Andrew Hecht


The bull market in gold did begin in 2019. At the turn of this century, the Bank of England was in the process of liquidating half its reserves of the yellow metal. The central bank sold around 300 metric tons of gold via an auction that sent the price down to a low of $252.50 per ounce in August 1999. In February and April 2001, the low was $255 per ounce. The Bank of England sales and 2011 double bottom at $255 established the bottom in the gold market. Gold has not been below $300 since 2002, below $400 since 2004, below $681 since 2008, and below $1000 since 2009. The bullish price trend in the gold market is almost two-decades old.

Gold had traded in a $331.30 range from low to high from 2014 through 2019 after reaching a peak of $1920.70 in 2011. The price action last year could be a sign that the precious metal is going to challenge its record peak from 2011. Timing is everything in life, and markets are no exception. The gold market began another leg to the upside during the second half of 2019, and the upward pressure continued during the first month of 2020. If gold is ready to reach higher highs, the Velocity Shares 3X Long Gold ETN product (UGLD) is a product that will magnify the yellow metals percentage price performance on the upside for short-term risk positions.

Gold broke out in 2019

In June 2019, the US Federal Reserve told markets to expect short-term interest rates to decline by the end of the year. After four rate hikes in 2018 that took the Fed Funds rate to 2.25%-2.250%, the central bank indicated the rate would move lower. At the same time, the Fed indicated that its balance sheet normalization program that had been pushing rates higher further out along the yield curve would end.

The central bank followed through cutting rates by 25 basis points three times last year and ending its quantitative tightening program on July 31. The most lit a bullish fuse under the gold market.

As the monthly chart shows, gold broke out of the trading range that had been in place since 2014 when the price moved above the July 2016 high and level of critical technical resistance at $1377.50. The yellow metal has not tested that level since last June.

The next leg in a long-term bull market

The closest gold came to the $1000 level since 2000 was in December 2015 when it reached a low of $1046.20 per ounce.

The long-term quarterly chart shows that gold began its bullish run in the early 2000s when the price found a bottom at just over the $250 per ounce level. The price moved steadily higher to the 2011 high. After a correction that took the yellow metal to the late 2015 low, the next leg to the upside got underway in June 2019 with then move above $1377.50 per ounce. Since then, gold reached a high of $1559.80 on early September 2019, and another high of $1613.30 in January 2020. The ascent of gold has been slow and steady as the yellow metal has posted gains over the past five consecutive quarters. A closing price at over $1520 at the end of March would extend the streak to six quarters.

The quarterly chart highlights that both price momentum and relative strength indicators continue to rise. While both metrics are in overbought territory, they remained at that level from 2004 through 2011, for seven years. The metric only moved into an overbought condition in 2019 as the next leg of bullish price action got underway. Quarterly historical volatility at 9.49% is at the lowest level since 2012. The low level of the measure of price variance tells us that the price appreciation in slow and steady without any significant short-term price spikes. At the same time, the total number of open long and short positions in the COMEX gold futures market has increased to a new record level as the price rose. The latest high in open interest came on January 23 at 798,822 contracts. Before gold took off to the upside in June, the high in the metric was below the 625,000-contract level. Rising price and increasing open interest is typically a technical validation of a bullish price trend in a futures market.

A commentary on currency values and central bank monetary policy
The risk of a downside correction in the gold market rises with the price of the yellow metal. However, one of the most bullish signs for the precious metal has been that the price has appreciated in all currencies since last year. Gold reached an all-time high in most currency terms including, but not limited to, euros, British pounds, Japanese yen, Australian and Canadian dollars, Chinese yuan, Russian rubles, and many more. While gold did not reach all-time peaks in US dollars and Swiss francs, the yellow metal moved higher in the two currencies.

Central banks around the world hold gold as part of their foreign exchange reserves. The monetary authorities have been consistent buyers over the past years. China and Russia have not only purchased gold in the international market, but both nations have vacuumed up domestic production to build reserves. Last year, Poland was a significant buyer of the yellow metal, and in late 2019, the Poles repatriated one hundred tons of the metal from the UK to hold the gold within its borders. Even Germany increased its gold holdings in 2019. Central banks are a leading factor that validates gold as a reserve asset and hard money.

In 2008, the world’s central banks began to flood the global financial system with unprecedented amounts of liquidity or cash. Historically low rates of interest and quantitative easing programs to push rates lower further out along the yield curve created a tsunami of liquidity. With US short-term rates and 1.50%-1.75% and European and Japanese rates in negative territory, the tsunami of liquidity continues. The rise of gold and the next leg of the bull market reflects the devaluation of fiat currencies that derive value from the full faith and credit of the governments that print legal tender. The bull market in gold is a commentary on accommodative central bank policy around the world and the continuation of addiction to monetary policy stimulus.

$2000 gold or higher is likely, despite the current sell-off

On February 3 and 4, selling hit the gold market, driving the price over $45 per ounce lower.

The daily chart shows that the price of nearby April gold futures fell from $1598.50 on February 3 to a low of $1551.10 on February 5. Even the most aggressive bull and bear market experience corrective periods as they rarely move in a straight line. In a sign that we are witnessing a correction that will lead gold to another higher low, open interest declined from 798,822 contracts on January 23 to 652,257 contracts on February 6, a significant drop of 18.35%. Falling open interest when the price of a futures contract drops is not typically a technical validation of an emerging bearish trend.

The current selloff in the gold market could be a golden opportunity to hop on board the bullish long-term trend in the precious metal. If their activity over the past years continues, central banks will purchase gold during a period of price weakness, providing support for the price of the yellow metal. At the same time, all signs are that the US Fed will not change its monetary policy stance in 2020 regardless of economic data. During an election year, the central bank will go to great lengths to remain on the sidelines and maintain its apolitical status. The current level of interest rates continues to support the price of gold. When the current corrective move runs out of steam, it could be the perfect time to consider a leveraged product that magnifies the performance of gold futures on the upside.

UGLD on dips can turbocharge upside results

The fund summary for the triple leveraged Velocity Shares 3X Long Gold ETN product states:

The investment seeks to replicate, net of expenses, three times the S&P GSCI Gold Index ER. The index comprises futures contracts on a single commodity. The fluctuations in the values of it are intended generally to correlate with changes in the price of gold in global markets.

UGLD has net assets of $216.89 million, trades an average of 92,500 shares each day, and charges an expense ratio of 1.35%. UGLD and other triple leveraged products are only appropriate for short-term risk positions. A stable or lower gold price will cause the price of UGLD to evaporate as the price for leverage is time decay. The price of April gold futures rose from $1542.80 on January 14 to $$1598.50 on February 3, a rise of 3.61%.

Around the same time, the UGLD product rallied from $147.09 to $160 per share or 8.78%. The UGLD product magnified the price action in gold on the upside. For those looking for a deeper correction, DGLD is a product that provides leveraged exposure to the price of gold on the downside.

The long-term picture for gold remains bullish. I believe the yellow metal is heading for a challenge of the 2011 high of $1920.70, and we will see the price rise above the $2000 per ounce level. When the current correction runs out of downside steam, UGLD could be an excellent product to take advantage of another golden buying opportunity in the yellow metal.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

Author: Andrew Hecht

Source: Seeking Alpha: Gold – New All-Time Highs On The Horizon, Despite A Sell-Off

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