The Gold Breakout

March 8, 2024No Comments

 

Technical Breakouts and the Things to Consider

Today we are going to talk about the technical breakout on Gold. Everybody must have noticed it. Gold broke out from a lid it’s been stuck in for at least five years. What I want to talk about is: Is this Gold breakout [00:00:30] sustainable? Should we buy the Bullion or should we buy the Producers? And, are there any danger signals or bullish signals suggesting that we become aggressive or cautious around this trade? So to start with, a breakout is a breakout. We went through about 2,100 and changed. That’s good news. It’s at an all-time high. When we’re looking at a Gold breakout, we then want to check to see if the breakout is [00:01:00] causing the market that we’re concerned with to be overbought.

 

The Gold Breakout – Three Key Indicators

[00:01:04] In the chart below, I’m showing you three familiar indicators. One is RSI, (Relative Strength Index). It’s a momentum indicator, kind of a mid-range look at price momentum. Then we’ve got MACD, which is the difference between moving averages. It’s a different construction than RSI, which compares itself today to a 14-day-ago [00:01:30] lookback period. In price movement, MACD is more comparing the distance between a very short – and a very ‘mid-range’ let’s call it – moving average. The more they squeeze together – either from shorter-term average moving up, or shorter-term moving average moving down – tends to show us which way price momentum is moving from a trend perspective. Then the third [00:02:00] is MFI. And that’s just Money Flow, which is typically advanced decline type of stuff with a momentum indicator applied to it. That becomes the MFI Indicator. I find that indicator extremely good at picking overbought/oversold signals on a mid to long-term basis.

 

Gold breakout Gold Continous Contract

RSI – Comparing 2020 and 2022 to Today

So, let’s get started. Let’s talk about the first indicator: RSI. It’s not overbought, although [00:02:30] it’s getting there, but you’d expect after a rise like this, it’s going to get up there. What’s interesting is, if I just bring your attention back to the price chart is that if you look at 2020 during the COVID crisis, Gold spiked. Everybody was afraid that the Dollar would get crushed and all this different thing. So Gold went up – and it went up parabolically – you can even see that I’ve noted that on the chart. Whenever something goes up, basically like a rocket ship without any [00:03:00] peaks and troughs and pauses along the way, we call that ‘parabolic’ and those kinds of movements are almost always reversed. Almost always. Parabolic moves never last for long.  So, that’s what happened after the rush into early 2020, Gold fell. Then, we saw another rise in 2022. If you look at the chart, it was pretty parabolic. Once again, Gold hit its resistance point and then fell. [00:03:30]

When we look at the current rally and breakout on Gold, you will notice that it wasn’t a parabolic break. The market really started rallying reasonably from the beginning of 2023, and here we are on March 6th of ’24 and we’re seeing a breakout. It’s been a nice ‘gentle trend’, you might say on the way [00:04:00] to this breakout. So, this is good news for breakout fans like me. RSI is not overbought.

 

MACD and Money Flow Index:

Let’s take a look at the other two indicators. Remember, MACD is a little bit longer-term-looking because it is usually moving averages and the distances between them to determine price momentum. You can see it’s not overbought, and neither is Money Flow [00:04:30] momentum. Money Flow is a concept of looking at how much money is either flowing into or out of that particular commodity or stock. So, these indicators are not showing an overbought, irrationally exuberant situation as they were in the previous two parabolic moves. But I do want you to notice that those two indicators (that is MACD and MFI) are diverging negatively. Notice my [00:05:00] little trend lines on those two indicators that are showing that they’re moving down. So, that’s the danger signal. When we see MACD diverging, it’s typically NOT good news.  I like the gold breakout. I like the fact that they’re not overly overbought as far as the indicators go. I don’t like the divergence. So, my way of doing things is we own a little bit of Gold, but we’re stepping in gently.

 

The Gold Breakout –  Producers: The XGD ETF

[00:05:30] Next, I want to talk about the Producers because we’ve mainly stepped into Producers, but we’re just doing the first legs. If you’ve taken my online trading course (and I recommend you do), I talk about how to ‘leg into a stock’. You don’t just take all your money and dump it into a stock or position, you ‘leg in’. I have a strategy that I explain in my online trading course, please take the course if you haven’t, it’s probably the most important thing you can do as a trader. I created it for retail investors [00:06:00] and priced it to allow you to get in and understand and get insight on how professionals such as myself, trade for a managed account.

So, back to what I was going to say about the Gold breakout and Producers, and that is that I have legged-in, in an individual stock, which has done well, and I’ve also logged in once with the XGD. [00:06:30] The iShares XGD ETF is a Gold Producers ETF. That, so far has not done so well. You can see on the XGD chart below it’s all of the different producers are mashed into one index. And if you know anything about Gold, there’s such a discrepancy between the different Gold Producers that it’s really hard to call anything an “Index” with these guys. But whatever the case, the Producers in general seem to be trading somewhere [00:07:00] between 15 and 23. It’s about 17 right now.

Gold breakout XGD

The Gold Breakout – Comparing Gold Bullion and the XGD ETF

The Producers chart is miles apart from the Bullion chart, and the reason is because there are good Producers and bad Producers, whereas Gold is Gold. So, Gold has broken out through its old lid, but XGD isn’t even near its old lid. But the good news is, if Gold continues to stay above that gold breakout point, I give it a good chance despite [00:07:30] the divergences. If Gold stays above the breakout point, or if Gold continues to move up, you’re going to see the divergences reverse. So, let’s just keep an eye and not necessarily rush into the trade, but the Producers might be a valuable way of playing it because they’re so low. My thoughts are if the Producers do continue moving in the right direction after that breakout, you’ll probably see the XGD [00:08:00] move up closer to the top of the trading range.

Now when you think of it, if it’s around $17/share now, and the top of the trading range is around $23 (give or take) – that’s a pretty monster move. That’s not a target, or a prediction, and it’s not a recommendation because I don’t know if Gold is going to carry on with its breakout, but for those of you who like the idea of legging into something to take small steps a bit at a time per my online trading course, the Producers might be something [00:08:30] you do a small leg in. Dip your toe in the water.

So, I hope that provides you with some evidence and some insights on how I’m viewing the Gold breakout right now. If you have any questions, you can always post them below.

By the way, please be sure to subscribe to our videos and they’ll be emailed to you directly.  Either way, you’ll get insights like this that are not reported on the regular blog. Have a great day.  Thanks for watching this video on the Gold breakout.

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