Gold Could Experience Significant Gains

Summary:

• Gold market Overview at the top of the post
• Positioning / Investment options at the bottom of the post
• Analysis: Short, Medium and Long-term analysis with rationale in the middle

Introduction

On April 4, 2017 we mentioned that the Gold rally could pause over here. At that point Gold was at 1263 and today its at 1245. Following chart shows the ~4 month sideways consolidation in Gold:

What happened to Gold was that it succumbed to excessive optimism among market participants and as a result wasn't able to muster enough strength or the wall of worry wasn't strong enough to allow Gold to climb beyond immediate resistance levels.

At the same time, stock markets around the world did pretty well, which dampened Gold's demand. As a result, sentiment turned extremely sour towards precious metals. for example:

• Daily sentiment Index reached: 10 out of 100
• Long Positions of major hedge funds reached lows not seen since late 2015
• Articles started coming out proclaiming much lower Gold prices and Bitcoin being the new Gold

Both of these development highlighted the fact that in July (after 3 months), wall of worry had again gotten stronger. And now we are at a different phase in Gold. We will evaluate Gold from near-term perspective to long-term to understand what is coming-up next.

Near -term:  Since July 11th  Gold has been stair-stepping higher without any major move, which is good because its moving under the radar. Secondly, it is tracing out a sequence of 1s and 2s, which can lead to a sharp move higher in wave 3 of 3. 

Medium Term: While Gold and Gold stocks prepare for acceleration on the short-term time frame, they are also positioned very well for a rally in medium term. Because at this time frame, Gold also completed a sequences of 1s and 2s. Even though following chart shows Gold stocks, bullish case for Gold is similar if not better.

Longer-term: Gold is tracing out an inverted Head and Shoulders pattern. This pattern, once broken can lead to 1400 price. Important thing to note is that this price target might will not be achieved in one day but will reach there over time.

Rationale: There are many reasons that can propel Gold to higher levels some of these include:

1. Potential correction in Stocks and Gold acting as the safety trade
2. Potential increase in geo-political tensions
3. Continuous weakness in US Dollar Index, which was one of the big trades at the start of the year but we mentioned in February on twitter (@survive_thrive) that this US Dollar rally might be over, so one should look for alternatives. We will discuss US Dollar index in greater detail in another post. 

Positioning

Markets are at a critical juncture. However, knowing that is one thing and acting on this information is totally different in our experience. We mentioned following big moves on this blog/twitter in 2017 but doubt if effective trading was performed around this analysis:

• March Top
• April Top in Gold
• April Bottom in Stocks
• Emerging Market buy in February
• Early July bottom in Nasdaq
• ...

At this critical time, we are using proprietary models to expose clients to positions that have the highest success probability.  Our strategies have generated consistent returns, while taking advantage of new market opportunities and minimizing existing risk. We provide Absolute Return Hedge Fund like strategies through Managed Accounts. Performance - H1 2017 

Contact

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Gold Rally Can Pause!

We started investing in Gold in 2016 April, after 4 years of being out of the Gold market. We again increased Gold exposure at the start of 2017, in our proprietary strategies (Jan / Feb

2017 Investment Strategies' Performance). Overall, Gold remains in an uptrend but recent development has made us wary of immediate upside of Gold. 

In this post, we have analyzed Gold's short-term prospects using multiple analysis techniques to showcase the rationale behind our caution:

Technical

After experiences a sharp decline in early March, Gold has rebounded nicely. It is now testing significant trend-lines (show below). These trend lines could act as resistance in the near-term and force Gold to consolidate.

Sentiment
While Gold could experience a pause, it will be a very constructive development. But what is not constructive is the fact that news media has recently turned bullish on the yellow metal. Following are some of the recent bullish Gold headlines:

Furthermore, other sentiment indicators also suggest that Gold and Silver are in for some turbulence. Following chart shows Silver positioning among large and small traders. Current positioning is at levels that have resulted in Silver going down or sideways.

One cannot believe the financial news media because they get behind a trend, once everyone is on board. A detailed analysis of 2016 news and market action is presented here. Therefore, investors need to remain objective in terms of their direction and action plan.

Short-term structure:

With sentiment picture on the optimistic side, its likely that the trend will experience some pause before really asserting itself in the next few days. Above chart shows a potential inverted head and shoulders pattern being formed in Gold. However, the right shoulders doesn't look complete. Some back and forth action will be ideal to complete this structure.  

Gold Influence

Gold is significantly influenced by USD and Euro. Strong dollar pressures the commodities complex. It looks like Dollar has completed a long-term correction since the start of 2017, and could rally for few weeks. Start of 2017 is the same time when Gold start rallying. Once US Dollar rallies, it would be negative for Gold and Silver markets.

Furthermore, Euro long positions are also very extreme, which means that Euro will soon experience correction. Euro decline will also fuel Dollar rise; another reason that could dampen Gold’s ascent.

Conclusion

Gold could experience some resistance around these levels because of technical, sentiment and influence from other areas. However, that doesn’t mean that Gold will not spring back or it has entered a down trend. In financial analysis, one needs to remain objective.

How are we positioning?

We have reduced our long exposure but maintain long positions because Gold remains in an uptrend, as per proprietary Market Classification Model. Details will be shared with subscribers by April 9th. Our conservative proprietary strategy has out-performed the market in 2016 and in Q1-2017 through objective risk-management and a combination of strategic & tactical allocation. Detailed performance analysis will be shared in next 2 weeks.

Want to Invest

You can invest in these strategies through “Managed Account” offering or by subscribing to some of the services like Market classification Model (subscription page). MCM serves as the backbone for our model and can help you develop an understanding of the markets.  If interested in investing, you can register below and we will send an update. 

 

Gold Market Sentiment & Structure Confluence

In the last post we suggested that the trend in the Gold market is about to exhaust itself based on structural analysis (link). Since then the gold declined for a day and helped solidify the pattern, along with pessimism, necessary for a sustainable bounce.

Gold Sentiment
Gold sentiment has dipped to levels last seen near last year's lows. Following snap shots are from Daily Sentiment Index values on Nov 21.

Following chart shows longer-term DSI values (originally published by Taylor Dart). We can see that DSI is at lowest levels seen in last year.

Gold miners are also extremely oversold. They are at levels where we have seen major bounces in the past. This bounce can turn into major rally, dependent on internal market strength.

Hulbert index also shows that the sentiment is now negative 18%, which means that the average newsletter writer is now recommending shorting gold. Even though it is not at the lowest level, we have seen higher lows in the sentiment at the bottom. So it's possible that gold prices might bottom with a little elevated sentiment.

Market Classification Model
Along with all the positive developments on the sentiment front, the Market Classification Model remains in a bull market for Gold. As a result, we should not only expect a bounce but a resumption of the uptrend. This resumption could lead to acceleration to the upside. If the market completes the inverted head and shoulders pattern, we could easily see 1800 in 2017.

In the next blog post, we will discuss Fundamental reasons that could support this rise in Gold prices including asset rotation and Indian decision to restrict currency.

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Gold Market - Approaching a Turn

Gold market has been declining for the past few months. This decline came after a very sharp start of the year rally in Gold. Based on gold market's fundamental, technical and sentiment analysis, Gold is approaching a bottom. From a technical perspective, there are three distinct reasons that point us towards an approaching Gold market bottom:

1. Intermediate term Gold structure
2. Longer-term goal structure
3. Market Classification Model

Intermediate term Gold structure

Gold prices topped in early July. The peak in Gold prices coincided with Brexit panic. Since topping in July, prices have gone down in a choppy manner - characteristic of a market correction.

Even though Gold prices spiked on US election night, they went down and have declined since then. If we look at a slightly longer-term pattern, it seems like that the recent decline is part of a big corrective pattern that started in May. 

As a result, this correction will be wave 2 of the rally that started in Dec 2015. Once this wave ends, we will be in for a very sharp rally in wave 3. This rally will most likelt take the prices to near the all time high. Another evidence in this regard is the inverted head and shoulders pattern being carved out by the precious metal:

Inverted Head and Shoulders

Following chart shows weekly Gold prices over last few years. Once can see a nicely formed inverted head and shoulders forming. Once this pattern is completed, it's target is around 1800 level.

Other reasons to support the fact that Gold is approaching a major bottom is the pervasively negative sentiment as evident from Daily sentiment Index, Bullish Percentage Index or Hulbert Gold Newsletter Index.

Market Classification Model

Our proprietary Market Classification Model remains in a bull market. MCM utilizes prop trend identification algorithm to decipher between bull and bear markets. Currently it is in a Bull market. It entered a Bull in April and has maintained its posture since then. We use MCM to make investment decision and add positions.

In the next blog post, we will review sentiment analysis for Gold and fundamental reasoning for a gold rally.

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Structural Analysis of Gold

Gold has been declining for the past 2 months. Gold spiked after Brexit vote but since then it has gone sideways.

Above chart shows that the Gold bottomed at the end of 2015 and then rallied for more than 6 months. After topping in early July, Gold went sideways for 3 months before undergoing a sharp decline at the beginning of October'16.

However, interestingly, latest decline has just completed a 3-wave corrective structure in Gold. 3-wave corrections represent that the primary trend remains intact and we are just experiencing a minor pull-back in the asset.

A similar pattern is visible in Silver. But Silver is sporting a much more clearer structure. Recent correction was clear 3-waves with a triangle in the middle. 

Furthermore, Silver is sporting a series of 1s and 2s which means that a big rally is coming in the Silver market. And when Silver starts to rally hard, it is a good time for Gold to follow.

Now that the Gold and Silver are showing that they are undergoing correction in broader uptrend, let's look at the Gold stocks. Gold stocks have rallied amazingly since the beginning of this year. Almost 200% rally from January bottom in GDX. Recently, they have also undergone similar correction over the past few months.

Following chart shows the performance of gold stocks:

Gold stocks clearly show a 3-wave decline, which means that this is just a correction and primary trend will resume soon.

Overall, the trend remains up in precious metals as shown by the market structure analysis. Market Classification Model also remains in a bull market for Gold. Therefore, we are very close to a bottom of this correction in Gold and will soon see a resurgence in the yellow metal.

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September Performance Recap

September was a volatile month in the markets.

If you look at the SP500 chart, it has been going sideways and frustrating many market participants.

As we mentioned in the last post, pretty much all the major asset classes have experienced sideways action over past month.

2016 has been a volatile year so far with markets declining sharply in Jan and February, followed by a nice rally. During these volatile times, our proprietary strategy has out-performed the SP500 by 16.3%.

SP500 Performance (Jan - Sept) = 7.8%
Conservative Strategy (Jan - Sept) = 24.1%

Cumulative performance since January in relation with SP500 (total returns) is shown below:

Monthly Performance: 

Following chart shows monthly variation in performance.

Model is agile enough to take advantage of trend changes and re-allocate in strategic positions prior to big market moves.

All of these returns are for a portfolio whose current Beta is 0.32 and whose YTD Beta is -0.57, which means that these returns are totally uncorrelated with the market. Therefore, portfolio has a very high Alpha.

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September 2016 - Market Recap

September was a volatile month for all asset classes, as it started with a sharp decline in Stocks, Bonds and Gold. We will discuss these assets below and will leverage this information for October forecasts.

However, need to highlight that last IPM turn window was scheduled for September 26th. Market has made a bottom on September 26th and it's possible that we will see a sharp rally in the next few weeks. We will share details on the IPM turn window in next couple of posts. We are already positioned in our aggressive IPM based strategy to take advantage of this date.

Bonds

• Since the start of September, Bonds experienced severe decline
• Decline brought out the bears, as expectations of an impending FED rate hike increased
• The decline was so severe that at one point, TLT has decline -4.4% by mid month
• This decline was followed by a sharp rally to near break-even levels for the month
• In summary: A lot of volatility but no real action / direction, which is apparent from following chart

Stocks

• Stocks opened September slow but soon after the long weekend and on the heels of a strong jobs report took a nose dive

• Even though the low that was made in early September still holds as the low for this correction, stocks' sideways gyration pushed many investors out of the market till the end of September.
• Fed did not raise the interest rates and their expectations saw a sharp decline, which suggested that the stocks can rally further
• Decline in optimistic sentiment has allowed us to consider this sideways action as consolidation before next move higher.
• Following blog posts were published in September on stocks:
• Sideways Consolidation nears End on 9/30
• Inverted Head and Shoulders pattern abound on 9/29
• Correction Complete - Approaching Vacuum on 9/22
• Technology getting ready for a Break-Out on 9/20
• Interesting 5 days in Stock Market on 9/15
• IPM Model Review on 9/7
• Overall these posts have been spot on in regards with the overall trend of the market

Gold

• In contrast to Stocks and Bonds, Gold started with a sharp rally. However that rally fizzled out
• Since then, Gold has been going sideways. There are two options for the Gold in the month of October:
1. Gold and precious metal complex has already bottomed and will soon rally to new highs
2. Gold has traced out a triangle and will decline in October, to mark a bottom
• Both of the above scenarios suggest that the metal will be higher in future months. The question is whether it will take a detour to lower prices before rallying

Summary

• Consolidation is the name of the game
• Overall SP500 gained +0.02 %, Bond lost -1.7% and Gold gained 0.7%
• We will soon see a well-defined trend but volatility might continue till Presidential elections in November.

Upcoming Blog posts:

1. Strategy Performance - September recap
2. Forecasts for October
• Stocks - Elliott Wave and IPM Model
• Bonds - Structure and relationship with stocks
• Gold - Long-term targets and patterns
3. Performance of Options strategy based on IPM Model

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Gold Movement

Gold experienced a sharp decline today, while Gold Stocks were massacred with a 7% decline in one day. This kind of price action was very important to remove the excessive optimism that had plagued the Gold market.

Since early July, Gold has been consolidating sideways. Following chart shows a potential pattern being traced out by Gold.

Gold price action appears to be corrective in nature i.e. first decline was followed by a triangle formation. Triangle has recently broken to the downside. Minimum target of this pattern will be a decline below 1310. We think that over the next few days, gold will bottom around ~1300 and then it can resume its trend. This level signifinies Fibonacci ratios and support line.

This decline will also bring back the bears and force many weak longs to get out of the market, just before the next rally phase, according to Market Classification Model.

MARKET CLASSIFICATION MODEL

A proprietary algorithm that classifies market conditions i.e. Bull market or Bear market. Currently, this model is suggesting a longer-term up-trend for the US Stock Market. For Subscription click below: