There’s recently been a big focus on gold’s price moves. What happens next to the price of gold is more important. There is a potentially binary event ahead.
Let us explore the issue with the help of two charts.
Please click here for a weekly annotated chart of SPDR Gold Shares GLD, +0.19% GLD, +0.19% an exchange traded fund (ETF). Please click here for a daily annotated chart of the same ETF.
Please note the following:
• Gold has broken above the strong resistance zone shown on the daily chart. This is bullish.
• Gold trades around the clock. However, that is not the case with the gold ETF. The daily chart shows a gap open above the resistance zone. This is highly bullish.
• The move in gold occurred on good volume on both daily and weekly charts. This is bullish.
• The weekly chart on gold shows a bottoming pattern. This is bullish.
• The relative strength index (RSI) on both daily and weekly charts is overbought. This is bearish in the short term and indicates a pullback if the news flow stops being supportive.
• The weekly chart shows that, for the long term, gold is still in the resistance zone. For gold to go to a new high, such as $2,000 an ounce, gold will have to decisively break the top band of the resistance zone shown on the weekly chart.
• For very short-term trades, the top band of the resistance zone shown on the weekly chart is a potential target.
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Three events
Three events have accelerated gold’s rally.
1. The European Central Bank (ECB) unexpectedly turned more dovish than the consensus.
2. The Federal Reserve followed the ECB with a dovish message.
3. Iran shot down an unmanned U.S. drone, creating safe-haven buying.
The next big event
The next big event is a meeting between President Trump and President Xi at the G20 in Osaka, Japan, on June 28-29. If the two sides strike a good long-term deal, the probability is high for gold to fall as much as $100 an ounce in a short period.
On the other hand, if the acrimony between the two sides drastically worsens and Trump goes ahead with additional tariffs, the possibility of gold rising by as much as $200 an ounce over a period of a few days is not out of the question.
There are three reasons for this:
1. A breakdown in talks will put additional pressure on central banks to provide more monetary stimulus. Monetary stimulus is good for gold.
• A breakdown in talks will increase the probability of a recession. A recession would be friendly to gold.
• According to the algorithms at The Arora Report, a big part of gold’s rally has been a short squeeze. In a short squeeze, short sellers who previously bet on gold falling must buy the shares to cover their positions, exaggerating gold’s move up. There are still a lot of shorts sellers in gold. Further, new short positions are being established based on the overbought conditions. The conditions are ripe for another leg up in a short squeeze if there is new good news for gold.
Gold stocks
Of note is that important gold stocks Newmont Goldcorp NEM, -1.30% and Barrick Gold GOLD, -1.42% are breaking out. Also breaking out are gold miner ETFs GDX, -2.06% and GDXJ, -1.99%
Trading gold
Triple-leveraged gold miner ETFs are excellent vehicles for short-term trades — NUGT, -6.41% for the up move and inverse ETF DUST, +4.75% for the down move. Over the years, long-term Arora Report subscribers had the potential to make a lot of money with these vehicles. However, there haven’t been good setups in DUST and NUGT lately. A good setup has to take into account the following:
• Potential reward.
• Probability of the potential reward.
• Potential risk.
• Probability of the potential risk.
The adjusted risk-reward ratio has to be analytically based on cold, hard data that is known, and there has to be reasonable scenarios with high probabilities. The three events that have given rise to this gold rally would have been considered fairly low-probability events not that long ago. Signals have to be given in advance. To the uninitiated, it may seem easy to be consistently profitable with short-term gold-related trades, but in reality it is very complex. The secret to the success of The Arora Report in generating consistent profitability over a long period has been staying true to the discipline of proven algorithms and not trading based on mere opinions. Long-term investing in gold is a different story.
It is likely that the tide has turned, and there will be many good setups in DUST and GOLD, as there used to be before the recent lull.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at [email protected].
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