After the long awaited rally in gold, investors are asking me the natural question, “Is this the start of a new march for gold to $2,000?” Let’s explore some of the most important factors in determining the answer including the three events, two charts and the next big event. At a time like this, it is important even for macro based investors to pay special attention to the charts.
Three Events
Three recent events have accelerated gold’s rally.
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- European Central Bank (ECB) unexpectedly turned more dovish than the consensus.
- The Fed followed the ECB with a dovish message.
- Iran shot down an unmanned U. S. drone.
The three events that have given rise to this gold rally would have been considered fairly low probability events not that long ago. Not long ago, markets were positioned for tighter monetary policy from central banks. Now central banks have made a complete U-turn.
To answer the question about gold’s march to $2,000, first we have to answer another question. Will central banks become even more dovish or will they make another U-turn in favor of tighter monetary policy? The answer is not known at this time but will depend upon the next big event and if a recession is coming close.
Please click here for a weekly annotated chart of gold ETF (GLD).
Please click here for a daily annotated chart of gold ETF (GLD).
The most important point to note is that the weekly chart of gold shows a bottoming pattern followed by a breakout. This is highly bullish for the long term. Also bullish is that the breakout occurred on good volume on both daily and weekly charts.
The breakout is above the resistance zone shown on the daily chart but the price is still within the larger resistance zone shown on the weekly chart. For gold to start its march to $2000, gold price will have to decisively break the top band of the resistance zone shown on the weekly chart.
From a short term perspective, RSI on both daily and weekly charts is overbought. This indicates a high probability of a pullback in the short term if the news flow stops being supportive. Keep in mind that overbought markets can easily become more overbought if there is further good news.
Short Squeeze
According to the algorithms at The Arora Report, a big part of gold’s rally has been short squeeze. In a short squeeze, short sellers who previously bet on gold falling, feel compelled to buy to cover and thus exaggerate the move up. There are still a lot of short sellers in gold. Further, new short positions are being established based on the overbought conditions. The conditions are ripe for another leg up in a short squeeze if there is good news in gold.
In the absence of further good news, instead of a short squeeze, short sellers will likely sell aggressively and drive the price of gold lower.
Trump And Xi
The next big event is the meeting in Japan between President Trump and President Xi at G20. If the two sides strike a good long term deal, the probability is high for gold to fall as much as $100 in a short period of time.
On the other hand if the acrimony between the two sides drastically worsens and Trump goes ahead with additional tariffs, gold moving by as much as $200 over a period of a few days is not out of the question.
Gold And Silver Ratings
The Arora Report precious metal ratings are widely used by bullion dealers, jewelers and investors across the globe. The Arora Report was calling to back up the truck and buy gold when it was in $600 range and then gave a signal to sell half of gold at $1,904 which turned out to be the top and a sigan to sell the other half of gold at $1,757 before the big fall.
The first cut of ratings on gold and silver at The Arora Report is generated by complex algorithms that automatically change with market conditions. Then human judgement is added before publication. Inputs to our algorithms include relationship between currencies, interest rates, sentiment, money supply, global geopolitical picture, global GDP growth, inflation in key countries, leading indicators of inflation, risk appetite, mine production and jeweler demand, smart money actions, speculator actions, and our proprietary technical indicators.
Here are our current ratings that take into account not only the rewards but also the risks. The goal of every investor ought to be to generate high risk adjusted returns, i.e., returns in excess of those commensurate with the risk taken. These ratings are designed to produce higher risk adjusted returns. In our over 30 years in the markets, one of the biggest and most common mistakes we have seen investors make is to ignore risk.
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- Temporarily suspended in the very, very short-term. The reason for temporary suspension is that the calls from The Arora Report are not mere opinions but are based on proven algorithms. Unfortunately there is no historical precedence for Trump and Xi meeting. Further, Trump is very unpredictable. Yes, we all can have opinions as to what may happen at the meeting. But there is no scientific way to predict the outcome. Our success at The Arora Report in consistently making accurate calls on gold over a long period of time is based on staying true to proven algorithms that are based on hard data. In this case there is not hard data at this time.
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- Temporarily suspended in the very short-term.
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- Temporarily suspended in the short-term.
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- Mild Positive in the medium-term.
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- Positive in the long-term.
- Positive in the very long-term.
These ratings are reviewed daily and changed frequently to help both long-term investors and short-term traders. For definitions of time frames, please click here.
Allocation To Precious Metals
From 2007 to 2011, Arora allocation to precious metals was 20% of the portfolio. For those who are inclined to always have gold in their portfolio, a long allocation of 3 – 5% to precious metals from a very long-term perspective has been the latest recommendation.
Based on the outcome of the meeting between Trump and Xi, The Arora Report may change this allocation for long term investors.
The long allocation of 3 – 5% to precious metals from a very long-term perspective is separate and distinct from Model Portfolios and trading positions that are subject to more stringent criteria.
For diversification reasons, our rules limit maximum allocable to precious metals and miners to 20% of the portfolio. Long time subscribers to The Arora Report have handsomely profited from our prior allocations of up to 20% of portfolio to precious metals both from long and short sides.
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