During the first week of August, gold briefly rallied up to $1835 only to rapidly and viciously get kneecapped over the next 60 trading hours, falling to a low of $1677 on the evening of Sunday August 8th. The Sunday night futures flush on August 8th was a classic gold market washout; I did not see a single soul brave enough to confidently proclaim that this was a buying opportunity and a major BOTTOM (while I held my existing gold and gold miner exposure, I was also too fearful to meaningfully increase my bullish bets on August 8th or 9th). In fact, there was a lot more fear that another flush to lower levels was just over the horizon, than there was optimism that we had just witnessed a capitulation flush.
The Daily Sentiment Index (DSI) for gold ended Monday August 9th at a reading of 8, the lowest level since the March 2020 covid market meltdown. Single digit DSI readings and deeply oversold technical conditions tend to result in major buying opportunities. This time turned out to be no different.
Fed Chair Powell proceeded to deliver the soft dovish touch I was expecting at Jackson Hole, and gold has rallied $160/oz in less than a month. Gold is now back to where it was a month ago, and it is on the brink of a big September test.
It's easy for market participants to become bearish after market sell-offs, and to become bullish after market rallies. And this is more often than not wrong-minded thinking. However, it is also common for the herd to miss key inflection points and the early stages of nascent breakout trending moves. Gold could be on the cusp of breaking out from its 12+ month correction/consolidation.
From a purely technical perspective gold is in an unabashed bull market on longer-term time frames (yearly, quarterly, monthly, etc.). After making a new all-time at $2,089/oz in August 2020, gold has spent the last year testing market participants and building a very high wall of worry. This sets up a situation in which the bullish ranks of gold investors have been thinned out, and gold is now one of the most hated major investment classes. This lack of love for gold exists during a year in which gold is on track to have its highest ever year-to-date average price (higher than 2011 or 2012), over $1,800/oz. Gold miner profits are higher than ever before and producers are set pay out a record US$5 billion in dividends to shareholders in 2021:
The $1900 level is a big psychological level for the gold market, and it has quickly become an important technical level. A decisive weekly/monthly breakout above $1900 is likely to set in motion a retest of the August 2020 all-time high, and potentially open the door to new highs above $2100. The next resistance level is $1840, above which a test of the $1880-$1900 zone is likely. Gold has strong near term support between $1780 and $1800.
As most investors return to their desks by the end of this week we should see trading volumes increase. Sentiment is not yet close to being overheated and the CFTC CoT data shows ample room for futures speculators to increase net length. The overall backdrop is favorable to a further gold rally in September, however, that doesn't mean it will occur in a straight line or without significant volatility.
I will be attending the Beaver Creek Precious Metals Conference beginning September 8th and I look forward to sharing updates with you throughout the next week.
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