Gold has had a remarkable week, surging more than $100 in the span of the last five trading sessions:
Today's high of $1522.70 in December gold futures came about $1 short of a panic low at $1523.90 dating to December 29th, 2011.
Gold (Daily - October 2011/July 2013)
2011 you ask? Does previous support from nearly eight years ago actually still matter today?
My answer is, YES, it does. The $1525-$1550 area served as important support/resistance for more than two years before support finally snapped in spectacular fashion in April 2013 - this means that gold has spent 6 1/2 years below $1550. The first test of this area on the way back up is likely to be met with formidable supply as investors who bought at support between 2011 and 2013 are given their first opportunity to get out at break-even.
In my estimation, the most bullish scenario for gold over the near term involves a pullback and multi-week digestion between $1440 and $1500. Such a scenario would work off some of the overbullish sentiment we are seeing (Daily Sentiment Index for gold futures is at 97 as of the market close on 8/7/2019), and it would also help to cool off some of the technical indicators that are currently flashing red hot readings. On the other hand, any additional upside in the near term risks creating a "blow-off topping move" which could create a top in gold that could last much longer than a few weeks.
I think a lot of the recent upside move in gold has been driven by the extreme drop in Treasury yields that we have seen in the last week. This decline in nominal yields (not inflation adjusted) has brought the real 10-year Treasury yield very close to the 0 level which means that real yields (nominal yields minus inflation) are bordering on going negative. One of the major catalysts of the 2009-2011 precious metals bull run were negative real yields which made gold and silver much more attractive investment holdings due to the lack of opportunity cost for holding them - if bond holdings are giving investors a negative real return (even more negative after taxes are factored in) why wouldn't they substitute some of their bond holdings with precious metals?
While the downtrend in Treasury yields is pronounced, the recent move lower in yields is also extreme by any measure and looks like a panic capitulation:
10-Year U.S. Treasury Yield
To bet on more near term upside in gold one is also essentially betting that the crash in yields isn't over yet.
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