Gold’s Rest Didn’t Give It Strength

1. Gold’s Rest Didn’t Give It
Strength

2. Points To Be Covered Today:
• Gold’s Rest Didn’t Give It Strength
• USD Index Was About To Decline While Gold Will Rally
• Gold Stock’s Relative Performance
• Credit Spreads Declined Unprecedentedly. Will Gold
Follow?
• Implications For Gold
• How High Can XAU/USD Go
• Gold News & Analysis

3. Gold’s Rest Didn’t Give It Strength
• Given gold’s recent fall, a relief rally is clearly within the realm of
possibility. However, gold may lack the stamina to do even that.
• Based on the analogy to 2012, gold was likely to take a breather
within the decline that could have taken it as high as the 61.8%
Fibonacci retracement.
• And indeed, we did see a breather, but it took gold only a little higher,
and it seems that it’s already nearing its end. Consequently, waiting
for gold to rally now would be waiting for something that might have
already happened.
• To clarify, the size of the move is not that important here as the time
that gold took to consolidate.
• It’s fine to wait for the broader bottom to be formed, and that seemed
to be taking place initially.

4. Gold’s Rest Didn’t Give It Strength - I

5. Gold’s Rest Didn’t Give It Strength - II
• That was normal – we saw something like that several times, for
example in mid-March 2020 and mid-September 2020.
• However, gold has been consolidating for over 7 trading days. There
was no bottom in recent history that took so long to form.
• There were, however, small consolidations that took even a bit
longer. And we saw them after gold declined particularly profoundly.
• I marked those cases with red rectangles – they took place in
November 2020 and January 2021.
• And we see the same thing now. In both previous cases, gold
continued to decline, and it declined profoundly once again.

6. USD Index Was About To Decline While Gold Will Rally

7. Gold Stock’s Relative Performance
• The USD Index shaped its corrective downswing very similarly
to what it did in late March and early April.
• And since history rhymes, this could mean that a similar action
will follow. And back in April, the USDX simply rallied.
• Moreover, gold stocks’ relative performance not only hasn’t
stopped indicating the bearish outlook recently but also
provided a screaming sell sign once again yesterday.

8. Gold Stock’s Relative Performance - I

9. GDX ETF
• The GDX ETF declined and closed below its previous monthly
lows as well as below the late-April lows.
• This breakdown took place without gold’s help, which makes it
particularly bearish.
• The breakdown was even more profound in the case of the
GDXJ – a proxy for junior mining stocks.

10. GDX ETF - I
• The size of the recent “upswing” was comparable to the mid-
November 2020 one, so it confirms the analogy to this period
that I mentioned while discussing the gold’s chart.
• The next short-term downside target is at about $42 – a bit
below the previous lows as that’s where the 50% Fibonacci
retracement line coincides with the previous highs and lows
(and also with the 2019 highs that are not visible on the above
chart).
• All in all, it seems that the outlook for the precious metals
market –especially for the junior gold miners – is very bearish
for the following weeks and months.

11. GDX ETF - II

12. Credit Spreads Declined Unprecedentedly. Will Gold Follow?
• When credit spreads narrow, it’s bad for gold. But this time there is a silver lining
we can look for, although it’s quite adverse for the economy.
• There are several important factors affecting gold prices. Many analysts focus
mainly on the US dollar and real interest rates. However, what is sometimes even
more important is economic confidence.
• Of course, the level of economic confidence is partially reflected in the strength of
the greenback and the bond yields. However, I would like to focus today on credit
spreads, an often overlooked indicator of economic confidence.
• Why such a topic? It’s simple, just take a look at the chart below. As you can see,
the ICE BofA US High Yield Index Option-Adjusted Spread, which is a proxy for a
spread between the yield on below-investment-grade-rated corporate debt and
Treasuries of the same duration, has recently declined to a very low level.
• To be more precise, the analyzed indicator slid from almost 11 in March 2020
to 3.1 at the end of June (the lowest reading since July 2007, the time just
before the Great Recession started).

13. ICE BofA US High Yield Index Option-Adjusted Spread

14. Implications For Gold
• OK, great, but what does this mean for the gold market? Well, this is a
negative development for gold prices, but with a silver lining. Let me
explain.
• When credit spreads are narrow or in a narrowing trend, it means that
economic confidence is high or in a rising trend. In such an environment,
risk appetite is strong and demand for safe-haven assets such as gold is
low.
• The fact that credit spreads have reached their multi-decade lows
indicates that the economic expansion is doing well. If the boom continues,
the Fed will eventually normalize its monetary policy a bit, and the interest
rates will increase.
• Additionally, US banks have cleared the Fed’s recent stress tests, which
means that they will no longer face restrictions on how much they can
spend buying back stock and paying dividends.
• This change might strengthen the financial sector, additionally boosting
economic confidence among investors. And this is all bad for the yellow
metal.

15. Implications For Gold - I
• However, we can look at very low credit spreads from the other side.
After all, they have already decreased profoundly and further
significant declines are not very likely.
• Furthermore, the last time they were so narrow was mid-2007, i.e.,
just a couple of months before the outbreak of the global financial
crisis.
• Hence, it might be the calm before the storm. The economic
crisis, by definition, occurs when confidence is high and almost
nobody expects any problems.
• A related issue here is whether the markets are properly assessing
the risk. The low risk premium partially results from the low Treasury
yields, which push investors who seek profits into riskier securities.

16. Gold May Struggle For Some Time
• Some analysts point out the risks related to the surge in the public
debt or inflation.
• For example, David Goldman notes that the rising gap between
prices paid by the producers and prices received by customers
( June Philadelphia Manufacturing Business Outlook Survey) could
depress output in the future, as companies wouldn’t be able to
maintain profit margins in such an environment.
• The bottom line is that the US economy has recovered and the
economic expansion continues undisturbed.
• Given this trend and high economic confidence, despite the soaring
prices and indebtedness, gold may struggle for some time.

17. Gold May Struggle For Some Time - I
• However, credit spreads may widen abruptly when the next crisis hit,
as they did in the aftermath of the collapse of the Lehman Brothers.
• In other words, although the economic confidence is strong, some
important downside risks for the US economy are still present,
and they could materialize later in the future.
• Perhaps investors know this – according to the WGC, we saw
inflows to the gold ETFs last week, despite the plunge in gold prices.
• It shows that investors could have been taking advantage of lower
prices to buy gold as a portfolio diversifier and protection against tail
risks.

18. How High Can XAU/USD Go
• The Technical Confluences Detector is showing that gold is battling $1,766.50, a
price where the Simple Moving Average 10-4h and the previous monthly low
converge.
• Critical resistance awaits the precious metal at $1,775, which is the meeting point of
the 5-day SMA and the all-important Fibonacci 61.8% one week.
• Immediate support awaits XAU/USD at $1,764, which is the confluence of the
previous week's low and the Fibonacci 38.2% one day.
• Further down, another cushion is $1,749, which is a juncture including the Pivot
Point one-day Support 1 and the PP one-week S2.

19. Gold News & Analysis
• Gold has been recovering amid end-of-quarter flows.
• The Confluence Detector shows that XAU/USD is eyeing $1,775 as the next
target.
• It is the end of the month – and the quarter – and money managers are rushing to
adjust their portfolios, unwinding some of the recent market moves.
• For gold, that means reversing Tuesday's fall to the lowest levels since April.
• That drop was attributed to new Basel III regulations and also to the Fed's hawkish
policy.
• Source:
• Gold Forecast, News and Analysis - FXStreet

20. Gold’s Rest Didn’t Give It
Strength

21. Thanks For Listening
Gold’s Rest Didn’t Give It Strength