Who would’ve thought?
This trade war business continues to unnerve markets.
Overnight, US stocks fell sharply. Only a recovery towards the close made the final score line respectable. The Dow finished down 1.1%, the S&P 500 1.2%, while the NASDAQ sunk 1.6%.
On top of that, oil prices fell sharply while copper was down too. That old battle-axe gold did its job though and jumped around US$10/ounce to US$1,283.
Gold stocks have been under the pump lately but the gold price continues to look OK. As you can see in the chart below, it has been in a correction phase since peaking in February.
But so far, this correction hasn’t done any major technical damage. A few months ago — and a few times since — I showed you this chart with the green dotted lines. I said that the best thing for gold would be to correct and consolidate for a few months before making another move on major overhead resistance.
It made sense for gold to take a breather
It’s pretty much done just that so far. On a few occasions you’ve seen prices drop below the lower part of the consolidation range, but nothing major so far. And you can see via the moving averages that the trend is still to the upside.
Now, if we zoom out and take a longer term view of gold, you can see the recent moves in a better context. The rally from the August 2018 low to the February 2019 high was rapid. It made sense for gold to take a breather. Which is exactly what it has done.
Ideally, you now want to see gold move back towards the upper part of the consolidation range. You at least want to see it move above US$1,300 and stay there for a month or two.
That gives gold the foundation to launch a major move. And, as you can see from the longer-term chart above, a break above the thick green line puts the yellow metal into fresh air. If it can do that, the bull market is back on.
While nothing is certain, the odds are increasing that such a move is likely.
For example, overnight, the yield on 10-year US treasury bonds plummeted. As you can see in the chart below, the yield, at 2.3%, is the lowest it’s been since November 2017.
Yields tend to fall when economic growth prospects are weak and inflation is lacking. The bond market is telling you the US economy is slowing.
Why is this good for gold?
Well, gold is a safe haven asset, right? And US 10-year treasury bonds is the global benchmark ‘risk-free’ asset. So they compete with one another for the attention of global capital.
But gold doesn’t generate any income. Treasury bonds do. When bond yields fall, they increase the relative attractiveness of gold.
Now, to be clear, it’s not a simple matter of bond yields down, gold up. It depends on other things going on in the global economy at the time. And sometimes the relative moves happen with a lag.
For example, bond yields peaked in September/October last year, whereas gold bottomed in August. As bond yields fell, gold rallied. But bond yields broke below support in March, and are now at 18 month lows. Yet gold has been in a correction/consolidation period for the past three months.
If bond yields are falling because the global economy is slowing and we are moving into a ‘risk-off’ environment, it suggests the gold price is about to play catch up.
There is no such catch up to play for the Aussie dollar gold price though. Thanks to the RBA’s renewed fervour to cut rates when it’s not really necessary, the Aussie dollar is now below 69 US cents.
That’s great for the Aussie dollar gold price, which continues to trade around all-time highs, as you can see in the chart below:
While some Aussie gold stocks have done very well, you really need to see the US dollar gold price enter a new bull market before global capital starts flowing into the sector in a major way.
With US bond yields clearly signalling a slowing US economy, and the US/China trade war heating up, we could be on the cusp of a major shift in investor sentiment.
That could provide the boost gold needs to at least get back above the US$1,300 an ounce level.
If you’re not looking at gold stocks to add to your portfolio, now’s a good time to start.
And by the way, if you don’t yet understand the enormity of what’s going on between China and the US, then take some time to listen to this interview. Trump isn’t going to back down in forcing the Chinese to change their behaviour. When this dawns on the market, it will likely usher in a bear market.