I know a lot of people are bullish on gold because—alongside other precious metals and Bitcoin—it is the obvious play against the expectation of inflation stoked by the vast, worldwide central bank increase in the supply of money. But, there are a few points I want to make.
Technicals: I haven't been particularly happy with many of the charts I see people posting. The structures over the last few weeks don't make any supremely clear forms. Many people are seeing a consolidation right now in the short term, expecting a further move up. That may be the case. But I'm not happy with the look of it.
Going back a few months it may be possible to see a rising wedge, and I like the look of this much better. The wild swings we had during the COVID-19 crash are what contribute to many of the classical structures having a bad look to them, but if we understand those swings as false breakouts and a breakdown from this wedge, we get a much cleaner look. And the consolidation we have been seeing lately would fit the description of a classical overshoot at the end of that wedge, prior to an ultimate breakdown. We see a similar wedge and overshoot in the Nasdaq, for instance, a sign of buyer exhaustion.
What one would like to see in a pattern like this is a falling RSI, where the price action of the commodity or equity in question is making higher highs while the RSI is making lower highs, and that is just what we see here in gold (I have labeled the RSI numbers at various new highs). That is chronic weakness.
Fundamentals: I have a couple of points to make here. The first is that when the market crashed in February and March, there was a rush to physical gold, complicated of course by the shutdowns. Much of that rush came in the form of retail buying. Many local coin shops ran quickly out and many websites were also sold out of just about every kind of coin and bar (in both gold and silver). That is retail moving to physical and like any other asset class, normally that is a sign of a top, not a precursor to a longer-term move to the upside.
Furthermore, the initial crash earlier this year had all the hallmarks of a deflationary event. Of course the Fed intervened to prevent that from continuing. But I am not yet convinced that that deflationary force has run its course. And in fact, the Fed's unprecedented intervention may only have set us up for a second, perhaps even larger crash now. And the deflationary forces we saw may rear their heads again. That is, in a time of catastrophe, people will need dollars far more than they will need gold. And so heavy selling might return.
In sum: we may see an intermediate drop in the price of gold (weeks, months), but the inflationary forces may actually kick in at some point, after which gold may see heights few of us can even imagine. But that may still be some time away.
Technicals: I haven't been particularly happy with many of the charts I see people posting. The structures over the last few weeks don't make any supremely clear forms. Many people are seeing a consolidation right now in the short term, expecting a further move up. That may be the case. But I'm not happy with the look of it.
Going back a few months it may be possible to see a rising wedge, and I like the look of this much better. The wild swings we had during the COVID-19 crash are what contribute to many of the classical structures having a bad look to them, but if we understand those swings as false breakouts and a breakdown from this wedge, we get a much cleaner look. And the consolidation we have been seeing lately would fit the description of a classical overshoot at the end of that wedge, prior to an ultimate breakdown. We see a similar wedge and overshoot in the Nasdaq, for instance, a sign of buyer exhaustion.
What one would like to see in a pattern like this is a falling RSI, where the price action of the commodity or equity in question is making higher highs while the RSI is making lower highs, and that is just what we see here in gold (I have labeled the RSI numbers at various new highs). That is chronic weakness.
Fundamentals: I have a couple of points to make here. The first is that when the market crashed in February and March, there was a rush to physical gold, complicated of course by the shutdowns. Much of that rush came in the form of retail buying. Many local coin shops ran quickly out and many websites were also sold out of just about every kind of coin and bar (in both gold and silver). That is retail moving to physical and like any other asset class, normally that is a sign of a top, not a precursor to a longer-term move to the upside.
Furthermore, the initial crash earlier this year had all the hallmarks of a deflationary event. Of course the Fed intervened to prevent that from continuing. But I am not yet convinced that that deflationary force has run its course. And in fact, the Fed's unprecedented intervention may only have set us up for a second, perhaps even larger crash now. And the deflationary forces we saw may rear their heads again. That is, in a time of catastrophe, people will need dollars far more than they will need gold. And so heavy selling might return.
In sum: we may see an intermediate drop in the price of gold (weeks, months), but the inflationary forces may actually kick in at some point, after which gold may see heights few of us can even imagine. But that may still be some time away.