Got gold?

Friday, 28 June 2019
Melbourne, Australia
By Murray Dawes

  • Gold’s overdue breakout
  • The potential for a rally from here
  • S&P 500 vs CB balance sheets

There’s nothing like a good breakout to get everyone hot and bothered.

The sharp move in gold prices over the last few weeks has got a lot of tongues wagging and lifted spirits across the gold sector.

But if you aren’t already long a bunch of gold stocks, what are you to do? Jump in and buy as many as you can right now and hope this breakout higher in prices can be sustained?

In my experience chasing a breakout is rarely a good idea. My trading strategy is based on the fact that false breakouts occur far more often than breakouts and wrongfoot novice traders and investors.

So there is a real risk that prices could fall back below the breakout level of USD$1,375 and shake out all of the bulls who bought the breakout.

But the fact is the big picture remains bullish on gold, even if there is a big sell-off in gold from the current breakout level above USD$1,375.

On my charts I won’t be worried about the bullishness of gold until prices fall below the low made in August last year of USD$1,160. So prices can thrash around and shake all the new bulls out over the next few months and still be heading higher. A lot higher.

The current situation in gold isn’t a run-of-the-mill set up. I’ll explain why after a quick look at markets around the world…


Over the weekend, the Dow Jones Industrial Average closed down 10.24  points, or 0.039%.

The S&P 500 closed up 11.14 points, or 0.38%.

In Europe the Euro Stoxx 50 index finished down 0.57 points, or 0.017%. Meanwhile, the FTSE 100 closed down 14.06%, and Germany’s DAX closed up 25.71 points, or 0.21%.

In Asian markets Japan’s Nikkei 225 is down 80.43 points, or 0.38%. China’s CSI 300 is down 20.07%.

In Australia, the S&P/ASX 200 is down 31.50 points, or 0.47%.

On the commodities markets, West Texas Intermediate crude oil is US$59.13 per barrel. Brent crude is US$65.39 per barrel.

Gold’s overdue breakout

What we are seeing is a breakout in prices out of a five-year consolidation period. That is a whole lot of coke that’s been shaken up in the coke bottle. Take the lid off and things will explode.

The sell-off in prices since the USD$1,920 high reached in 2011 saw a near exact 50% retracement of the whole rally from 2001. In other words, the bull market never really ended. We’ve just seen a correction, that’s all.

The breakout we have just witnessed has basically confirmed that a new trend is developing from the low made in 2015.

For the past few years the jury has been out on whether the downtrend from 2011 was going to continue or not. With rates rising and central banks looking to take away accommodation, there was a strong case that gold would struggle to rally.

But now we all know that the central bankers have been kidding us all along. They aren’t going to normalise rates. They are far too scared and want to keep their jobs. So as soon as there was even a whiff of trouble in the data, they have undone years of work trying to normalise rates and have shown their hand to all and sundry.

I consider their recent capitulation to be of historic proportions. They have been leading us all to believe that they had everything under control and were slowly but surely raising rates and taking away the accommodations they had given the market to stop an all-out collapse of the financial system.

They have tip toed carefully, scared to wake the sleeping bear. Rates have crept up ever so slowly and had reached a high of 2.5% in the US over 10 years after the GFC had come and gone. And now the market expects the Fed to drop rates by 50bps at its next meeting! What? What a joke.

The S&P 500 is about 1% from all-time highs. Unemployment figures are at their lowest levels in a generation. But things are so bad that they need to drop rates by 50bps from an already incredibly low 2.5%?!?

I think we can now accept that the central bankers have officially worked themselves into a very small corner and are faced with a perpetual catch-22.

They have kept rates low for so long that they haven’t got a hope in hell of being able to normalise rates anytime soon.

When they raise rates even a little bit the market spits chips and the economy starts to creak. So they wring their hands and make up some lame excuse why they have to stop raising rates or even drop them. Catch-22. Caught hook, line and sinker.

The potential for a rally from here

The recent capitulation was the first concrete sign of the catch-22 in action. That’s why gold can go a lot higher than where it is now and why cryptos are going nuts.

How markets behave from here is going to be extremely interesting.

I’m currently of the view that we could see a correction in prices in the S&P 500 from overbought levels after a false break of all-time highs. But I am more than happy to jump on to the rally in a big way if prices breakout above the 2950-3000 region that has been stiff resistance for stocks over the past 18 months.

The reason I am happy to become a super bull above there is because of the capitulation by the central bankers. If the market considers rates will be lower for much longer than people anticipated and that the Powell Put is now firmly in place, we could quite literally witness a massive blow off rally that won’t stop until Jerome Powell comes to his senses and raises rates. Something akin to the rally that we saw in 1928-29 and 1987.

A rally that doesn’t have any corrections and that accelerates the more it carries on. That is what I believe we could see if the market thinks the shackles are off and the party is on, despite slower growth.

The other thing that would bring the central bankers to their senses would be if inflation took hold and they realised they were behind the curve.

But apart from a mad rally or a breakout in inflation it looks like we are going to see incredibly low rates for as far as the eye can see.

Gold has been struggling for years and never really rallied that much during the money printing years from 2011 to 2018, whereas stocks were flying during that period.

S&P 500 vs CB balance sheets

chart image
Source: Yardeni research Inc.
Click to enlarge

So as far as I am concerned gold has a lot of catching up to do and if central bank balance sheets start to expand again from here, in the near term that rally could go vertical.