Gold Tug-Of-War Continues Behind Bullish Backdrop

In a pattern all too familiar to gold traders, the price of gold dropped from its latest attempt at breaking out from its multi-week, sideways trading range on Thursday. This puts the gold price right back at square one as the lateral pattern continues and the bulls must now reassert control over the immediate trend. However, as we’ll discuss in today’s commentary, gold’s technical backdrop remains strong enough to suggest that the metal is consolidating for what should be a successful breakout to higher levels this spring.

Gold pulled back sharply from an 11-week high on Thursday as investors took profits and a rebound in global equities undermined gold’s safety bid. Spot gold fell 1.1 percent to close at $1,337 on Thursday, while June gold futures finished lower by $18.10, or 1.3 percent, to close at $1,342.

Gold’s losses for Thursday were somewhat limited, however, as fears lingered over the rising military tensions in Syria and continued concerns over a potential trade war between the U.S. and China.
The U.S. dollar index (DXY) was slightly higher for the day but the greenback wasn’t the overriding reason behind gold’s loss. Rather, it was the rebound in the U.S. stock market and the optimistic attitude among investors towards the upcoming first quarter corporate earnings season, which kicks off unofficially on Friday with several major bank earnings releases. Gold and the stock market have been inversely correlated, by and large, in recent weeks and any additional strength in equities from here could suppress the gold price a while longer and keep it from decisively breaking out of its 3-month trading range.
Indeed, the trading range alluded to has proven to be a vexing proposition for the gold bulls of late. Gold just can’t seem to muster the strength to forcefully push its way above the trading range ceiling which was established by its January high. Shown below is my gold proxy and trading vehicle, the iShares Gold Trust (IAU). After failing its latest breakout attempt above the pivotal $13.00 level – the trading range ceiling for this ETF – the IAU price has settled back toward the middle of its multi-week range. It hasn’t yet entered what I considered to be bearish territory, but it needs to establish support fairly quickly in order to prevent the emboldened bears from launching another raid like they did in March.

On the positive side of the ledger, the near-term technical outlook for the ultra-sensitive inflation commodities like gold remains encouraging based on the continued strength in the crude oil price. Shown here is the daily graph of the iPath S&P GSCI Crude Oil Total Return ETN (OIL), my preferred proxy for the crude oil price.

The 7 percent rally in the last three days has pushed the OIL price to a multi-month high, which in turn suggests a return of the inflation trade as the global economy shows signs of improving. As Dr. Ed Yardeni pointed out in a recent blog post, global trade remains at a record high. This is a good sign pointing to increasing demand for oil and other commodities. Historically, what bodes well for the oil price bodes well for gold. Accordingly, any additional gains in the oil price from here will signal a return of the inflation trade for gold on top of its recent safety-related demand.
Meanwhile the PowerShares DB Commodity Index Tracking Fund (DBC), my favorite commodity broad basket tracker, remains in a bullish position after having established a series of higher highs and lows since February. DBC also closed at a new high for the year to date as recently as Wednesday, as can be seen here. Fund managers tend to show their biggest buying interest in gold when oil and commodities in general (as reflected in the CRB Index or in DBC) are on the rise. This lets them know that inflationary bets are a risk worth taking.

On a strategic note, IAU confirmed an immediate-term buy signal per the rules of the 15-day MA trading method two weeks ago. This signal is predicated on a 2-day higher close above the rising 15-day moving average. I’ve purchased a conservative trading position in the iShares Gold Trust after it confirmed the immediate-term (1-4) breakout signal on Mar 23. I’m using the $12.55 level as the initial stop loss on an intraday basis for this trade. Meanwhile longer-term investment positions in gold should be maintained as the fundamentals underscoring gold’s two-year recovery effort are still favorable.