Having traded sideways since 2013, gold finally broke higher and strong investor demand has so far taken it above $1500/oz for the first time since April 2013. The strong momentum has been driven by the race to the bottom in global yields and central banks switching back to monetary easing mode. The gold rally has, despite general stock market weakness, been fueling strong gains among gold mining stocks. The GDX ETF which tracks major gold mining companies has rallied by 37% YTD and 13.5% this quarter alone.
The drop in global bond yields has resulted in more than $16 trillion of global bonds, particularly from Europe and Japan, now yielding less than zero. This development which removes the opportunity cost of owning gold, combined with worries that global stocks may struggle amid slowing global growth, has created a very friendly investment environment for gold.
This week the yield spread between 2-year and 10-year US Treasuries briefly turned negative for the first time in 12 years, causing a so-called inverted yield curve. Such a development has in the past been seen as a precursor for recession and the market responded by sending gold and bonds higher while stocks and crude oil took a hit.
The gold rush of 2019 is evident in the demand for “paper” gold through futures and Exchange-traded Funds (ETF). Hedge funds have accumulated a near record amount of exposure through COMEX gold futures while total ETF holdings have witnessed a steady increase reaching the current level of 77.5 million ounces, a six-year high. These developments represent one of the few clouds on the current horizon as they increase the risk of sharp reversals such as the 55-dollar top to bottom move in gold seen on Monday when the market responded to news about a potential easing of the trade war.
Having reached $1485/oz, the target mentioned in our Q3 Outlook gold has continued to move higher with the next target from a long-term technical perspective being $1587/oz, the 61.8% retracement of the 2011 to 2015 sell-off. The market is clearly in need of consolidation so any reversal in bonds and/or dollar strength may increase the temptation to book some profit. Just like $1380/oz was the support following the July breakout, the next support level to focus on now is $1485/oz as per the chat below. A break below that level will likely signal a period of consolidation with $1450/oz from a longer-term bullish perspective being the key level to watch.