A version of this post first appeared on The Felder Report PREMIUM.
Over the summer I noted that gold, after a great run during the first half of the year, was running into important long-term resistance. A few weeks later, in a conversation with Grant Williams for RealVision, I noted that sentiment in gold had also gotten far too euphoric. The precious metal needed a pullback before it would be able to embark on its next leg higher.
To be clear, I still believe gold has started a new bull market. Furthermore, the case for owning gold has not diminished because of Donald Trump’s election victory. If anything, it has strengthened. The prospect of rising deficits and inflation enhance the bullish case for owning gold, especially when you consider the fact that the Fed, or any other central bank for that matter, is not likely to change dramatically from its incredibly dovish bias any time soon.
And thanks to the “Trump Triumph Trade,” we have now seen a healthy pullback in gold accompanied by a complete shift in sentiment. Outflows from the gold ETF have persisted every day for nearly three straight weeks since the election. Headlines have become very bearish again, similar to what we saw as gold bottomed late last year. From a contrarian standpoint this is all very constructive.
What might matter most to the price of the precious metal, however, is the path of the dollar as they normally move inversely to each other. On a long-term time frame there are some significant bearish momentum divergences at play in the greenback. These are very similar to what we witnessed at the 2002 peak in the dollar. In fact, that 3-year analog is 92% correlated to the last 3 years’ trading in the greenback. Furthermore, this comes just as the Dollar Index tests the 61.8% Fibonacci retracement of its long-term decline since then. Technically, it looks ripe for a major reversal.
But the bullish case for gold does not just rest on the direction of the dollar. Gold is also an, “investment in monetary policy failure,” as Michael Lewitt wrote this week, or at least a hedge against it. And for anyone paying attention, it is becoming very clear that the “policy stakes are now very high,” to quote William White from a recent speech he gave in which he discusses in brilliant detail the waning efficacy and growing risks of the central bank experiment we have witnessed for the better part of the past decade.
The bottom line is the case for owning gold has only grown stronger over the past few months even while prices and sentiment have reversed. To me, technicals and sentiment have once again aligned to create what looks like a terrific opportunity to take advantage of what could be the very early stages of a major shift in the long-term trend of outperformance by financial assets over real assets.