This article was published on Business Times’ column “ChartPoint” on 11 September 2017.
Gold Monthly chart Source: Bloomberg, PSR
Tensions are rising once again in Korean Peninsula after North Korea recently launched a missile over Hokkaido and tested a Hydrogen Bomb that is five times as powerful as the atomic bomb dropped in World War 2. As the war scare looms, Gold and Silver acted perfectly as safe haven assets where Gold closed substantially above the $1300 psychological resistance and Silver closing above the $17.00 psychological resistance in August. More importantly, there seems to be a significant seismic shift in sentiment in Gold and Silver to the upside from the chart perspective.
Gold has finally ditched the downtrend since 2011 after finding a bottom in December 2015 which we believe is the eight-year cyclical low. The key turning point for the shift in sentiment is shown by the monthly close above the long-term downtrend line since 2011. That coincided with the much-needed bullish close above the psychological $1300 resistance at the end of August 2017 with price closing at $1325. Likewise, in Silver, the long-term downtrend line from the peak in 2016 has also been breached to the upside. These bullish breaks further confirmed the idea of Gold forming its eight-year cyclical bottom in December 2015 where a secular uptrend is under way.
Another critical indicator has also recently triggered a buy signal in Gold, which reinforces the secular uptrend thesis. The Gold-S&P 500 spread is the difference between Gold and S&P 500 Index. It is currently at a pivotal juncture now.
As Gold is a safe haven asset while S&P 500 is a risk-on asset, when we are at the extreme lows of the Gold-S&P 500 spread chart, an excessive risk-on reaction is occurring, usually during peak euphoria. On the other hand, when the Gold-S&P 500 spread chart is at the upper boundary, it tends to signal extreme risk off environment. Historically, mean reversion happens at the extremes, causing major trend changes within the underlying asset such as Gold.
Notice how perfectly the Gold S&P 500 spread signalled the 2011 peak in Gold when the Gold-S&P 500 spread chart retested the 567 high, that was formed back in 1980. The multi-decade level actually held up and provided a perfect signal for the Gold’s top 30 years later in 2011 causing Gold to fall -45%.
Using this principle, the Gold-S&P 500 spread formed a similar bottom in 2001 at -1220, which in hindsight is the new extreme low. During that period, Gold entered a super bull market and appreciated 550% over ten years. If history was to repeat, we might be witnessing a once in a decade opportunity now as the Gold S&P 500 spread recently retested the -1220 low in July, suggesting a raging Gold bull market ahead of us with a target of $1920.
With the ongoing safe haven bid and new secular uptrend, Gold looks very likely to retest the 2016 high of $1375. For the near term price action, we expect some short-term correction around the $1375 resistance area before buyers try to break above it.