With Gold once again near all time highs in recent sessions, we are hearing much chatter from the Gold Bugs who are preparing for an explosive rally. The long-term charts (see below) suggests that caution is warranted. This is not the kind of price action that we have historically seen in bull markets that have lifted resistance and traded far above the highs.
Rather, we see a market that is showing several signs of weakening conviction; all of these boil down to bulls losing conviction as momentum wanes on each successive rally.
Strategically we continue to see concerns over the USD and the EUR, combined with consensus expectations for softer growth levels going forward for several years, as the primary narrative driver for bulls in the absence of inflation. The fact that economic growth, while anemic, is real creates an offset to this argument as other asset classes such as equities may take short term favour (note that the near-term correlation between gold and equities is volatile).
Obviously the strong romantic attachment to gold by a portion of the investment community (and the broad consumer base of the developing and emerging economies globally) sometimes provides a momentum factor as price action itself draws in “dumb money” trumping any macro drivers.
Perhaps the bulls will be right. At best, technical tools can only define probabilities, not predict the future with any kind of certainty. There is no clear trade on these charts, but traders should be cautious if this market breaks to new highs and shows any signs of weakness. There will be many trapped bulls, and with the public increasingly involved in this market through ETFs such as GLD, there could be a dramatic stampede for the exits. Though we have no position or directional conviction at this time, we would suggest that scaling into long volatility positions with a bearish bias would be an appropriate trade as this market continues to edge up against resistance.