Gold Readying to Rally

Friday, October 6, 2017
By Paul Martin

By: Adam Hamilton, CPA
Friday, 6 October 2017

Gold suffered a sharp pullback this past month, spawning bearish sentiment. Futures speculators fled on surging Fed-rate-hike odds and new stock-market record highs. That pounded gold lower despite strong investment demand. This healthy sentiment-rebalancing retreat has left gold ready to rally again. Both its technicals and seasonals are very bullish, and futures speculators’ selling overhang has considerably abated.

On September 7th, gold powered 1.1% higher to $1348. That was exactly a 1.0-year high, gold’s best level seen since before Trump’s surprise election victory and the resulting extreme Trumphoria stock-market rally. But since gold had surged 4.9% higher in less than two weeks, greed was mounting again. So a couple trading days later, gold started selling off sharply and birthed this past month’s pullback.

As is usually the case in gold, the pullback spark was multifaceted. When gold had peaked, futures-implied Fed-rate-hike odds for its mid-December meeting were under 32%. But they shot up to 42% on Monday September 11th, when gold’s initial 1.5% drop kicked off this pullback. That day saw a strong relief rally in the stock markets, following a weekend where North-Korea and hurricane-Irma fears failed to materialize.

North Korea didn’t launch another ballistic missile or detonate another nuclear bomb for its Founder’s Day holiday, the anniversary of Kim Jong-un’s grandfather founding the modern country in 1948. And Irma’s eye veered south over Cuba before slamming Florida, dissipating enough of its energy. Thus Florida was thankfully spared from being razed like some of the Caribbean islands that bore Irma’s full force.

So the S&P 500 surged 1.1% that day, hitting its first new record high in five weeks. That lifted perceived Fed-rate-hike odds. As the anti-stock trade that often moves counter to stock markets, gold fell sharply on heavy gold-futures selling. That was pretty much the whole story of this past month’s entire pullback, a parade of new stock-market record highs and higher Fed-rate-hike odds fueling big gold-futures selling.

Thus by this week, gold had retreated 5.7% to $1271 in less than a month. During that span, no fewer than 11 new all-time-record-high S&P 500 closes were witnessed. That’s actually the biggest cluster seen in the entire post-election Trumphoria rally! And futures-implied Fed-rate-hike odds for its December meeting skyrocketed from 32% to 83% in that gold-pullback span. No wonder gold suffered heavy selling.

Big pullbacks always weigh on sentiment, breeding bearishness. So traders are now naturally quite pessimistic on gold’s near-term outlook. But that’s the very reason pullbacks and corrections exist, to rebalance sentiment. That keeps bull markets healthy. The excessive greed seen at major interim highs threatens to suck in too many buyers too soon, exhausting near-term buying. That can prematurely kill bulls.

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