Gold Due For Cyclical Pullback

I’m suspicious of any market that rallies to new highs going into a critical rate decision; it’s rare for that trend to continue. In this case, it’s the S&P 500.

Gold rallied $185 in about two months and prices are due for a cyclical pullback. A daily close below $1410 next week would support this theory, and I’d look for a bottom in the first few trading days of August. The severity of the pullback remains to be seen, but a backtest of the $1360 breakout is possible. If the Fed announces something drastic, then gold could abort its cycle decline and surge towards resistance near $1525.

With all the political and monetary intervention, it’s challenging to forecast near-term fluctuations. Sometimes prices will extend higher than most expect. Other times prices will drop suddenly without cause. For those reasons, I prefer a long-term approach.

My long-term strategy is simple – have and continue to build a core position. When it’s time to put new money to work, I buy undervalued assets like silver and platinum. I prefer bullion coins from the US mint. I’ll continue to do this month in and month out until it’s time to sell (several years down the road).

How will I know when it’s time to sell? Good question. One of the main tools I use is sentiment. Google trends is an excellent gauge for this. Below is a trend search for the “price of gold.” It spiked and reached an all-time high in August 2011, one month before gold peaked at $1923. When this gauge reaches 100, I’ll begin to look for signs of a secular top and commence my exit strategy. Generally, you don’t want to sell all at once – picking the exact top is nearly impossible. So I’ll sell off my core position in tranches into strength. As the bull market in gold crests, virtually everyone you know will be talking about the price of gold and silver.

US DOLLAR WEEKLY

The dollar formed an intermediate low in June at 95.36 and prices are poised to keep rising. Money continues to flow to the US in search of yield and safety. The 10-year bond yields in Germany, France, Netherlands, Switzerland, and Japan are all negative. At 2%, the US 10-year note must seem like a value.

GOLD WEEKLY

The two most logical targets for gold to gravitate to are the $1525 level, or a backtest of the $1360 breakout. Wednesday’s Fed decision will favor one over the other, and it likely depends on whether the Fed cuts just .25% or .50%.

GOLD DAILY

Prices formed a swing high after spiking to $1454.40. A close below $1410 would support an interim cycle pullback, and I’d look for a low in the first week of August. If the Fed decision is gold favorable, then prices could jump on the news and rally to $1525 before the next significant pullback.

PLATINUM WEEKLY

Prices remain under the 200-week MA, but we have a modest series of higher lows. A rally above the $920.40 high would signal a trend change and likely new bull market in platinum.

SILVER WEEKLY

Prices have struggled above the 200-week MA. I like the long-term potential in silver, but I’m not sure prices are ready to explode higher just yet. There is significant resistance between $16.75 and $17.00. It would take progressive weekly closes above $17.25 to signal a breakout.

GDX

We have a swing high in miners and one close below the 10-day EMA, steps one and two in producing a top. The next 45-day cycle supports a turning point in early August. If prices pull back into that timing window, I’ll look for short-term trading opportunities.

S&P 500 WEEKLY

Stocks are making new all-time highs before the much anticipated July 31 Fed announcement. A minimum 0.25% rate cut is expected – .50% is possible. Progressive weekly closes above 3050 following the Fed decision would imply a breakout and invalidate the potential megaphone topping pattern. Stocks could drop sharply if this turns out to be a “buy the rumor and sell the news” style event. With global bond yields at or below zero and many economies in recession, there are few places to park money. For that reason alone, I think US stocks could continue to rise.

WTIC

Oil remains weak, and energy is the worst-performing sector in the S&P 500. There are no signs of that trend changing – at the moment. Oil would have to rally and close above the July $60.94 high and the corresponding trendline to promote a bullish reversal.