Today we’re going to take a look at gold. Now, have any of you seen the movie, or movies I should say, surrounding the character Austin Powers? Mike Myers did a series of three movies. There’s rumor that he may be doing another. He always has a villain and if you’ve seen the movies, they’re absolutely ridiculous humor, but they’re literally for people who enjoy silly humor. They’re amongst the best you can see. Now, they imitate or make a mockery of the original James Bond films. Do you remember the old films with Sean Connery in particular, where the villain would be living in a hollowed out volcano?
They always lived in a volcano and they always tied James Bond up, but they never shot him or anything. They just left him and they would leave the room. So it’s a great series of comedy films that I would recommend if you feel like not being too serious for a night. In one of the three movies, they introduce a character called Goldmember. Of course, this is a mockery of the James Bond classic Goldfinger. I’m a real fan of these movies, as you can tell.
The reason I bring up the Austin Powers and the Goldmember episode in particular is because Goldmember would constantly be saying through the film, “I love gold, Mr. Powers”. So I’m going to address the question if we should be like a Goldmember and love gold. So let’s answer the question, should we love gold, Mr. Powers or should we avoid it for now? So this is the first quarter of 2023. I’m actually writing this on the 24th of February 2023 and what we’re going to do is look at some bearish and then some bullish factors surrounding bullion and the producer stocks. The last time I did a gold update, I believe, it was the 11th of August 2022. So it’s been a while. It’s been a good six months anyways, and here is around that time. Right there, the black line is gold.
You can see I was suggesting that I thought gold could go up a bit and gold did go up a bit. In fact, it went from around 1700 or 16 something to around 1900 so it was an okay trade and the stocks in particular did well. I presented some arguments as to why that might happen and one of those arguments was that gold and the US dollar have almost a perfectly negative correlationship. What that means is that most of the time, not all of the time, but most of the time gold and the US dollar move in opposite directions and that’s because when people believe the US dollar is going to go down, they go to gold, believing it’s got material value, goes back to the original bullion backed currencies many years ago. If the US dollar is looking like it’s going to go up, then gold sells off because there’s less fear of holding the US green back.
You can see the relationship and the trends here. The black line is gold and the red line is the US dollar. But this line in particular down here is very important to pay attention to because this is the actual statistical correlation between the two. So the middle line is here, meaning zero. You’ll see on the right side it’s zero. That means that there’s no correlation whatsoever. Anything below the zero line means negative correlation, meaning that they move in opposite directions or they are moving in opposite directions and anything above the zero line is a positive correlation. Now you can easily see that most of the time the relationship is negative. The line is most of the time below zero. The occasional spike they move into a positive correlation.
But most of the time, if the US dollar’s going down, gold’s going up and vice versa. You can also see gold versus the US dollar on a relative strength basis here. It’s just another study and you can see that there are trends where the gold is underperforming, it’s outperforming, et cetera. So the general trend since 2021 has been for gold to underperform, although we did get that spike right around the time when I was blogging, throughout most of 2022 by the way, that I was suggesting to buy gold. Now, let’s take a look and see if that relationship may be changing. What I’m going to do is I’m going to take a look here with this red arrow and you can see that the US dollar was moving down, may be moving up right now and you can see the opposite, the black line, meaning gold, was moving up but it may be rounding over. We need to get some more concrete proof to see if that’s likely to continue. So let’s do that.
So let’s take a look at the chart of the US dollar. This is going back to 2019, and you can see there was a bit of a lid on the US dollar and there was kind of what’s called a rounded bottom with a bit of a handle formation and it broke out. This is US dollar based on its value against a basket of international currencies. So you can see that this value of 100 is not really an actual exchange value, it’s just a basket of currencies. But it was trading around a hundred as its breakout point. It moved to 114, almost 115, and it pulled back to 100 again. That was the reason why gold was a good hedge because the dollar was falling from around that 114, 115 area back down to close to 100.
But look what’s been happening lately. You can see that right on schedule at that 100 level support it’s bounced off perfectly, I mean absolutely perfectly, just like it did here and just like in the past, that was acting as a technical resistance point. So this is really interesting in that from this perspective, there’s possibly some upside on the US dollar on a relative basis to other currencies. Now, let’s take a look at gold and you can see that this is going back to middle 2022. This is when I was liking gold around the $1650 area and I did blog on it. It went from that $1650 area to $1950 or so. So $300, not a bad trade and we made a little bit of money on it and then we sold it.
We sold it recently. Why did we sell gold? Well, you can see this long-term resistance pattern of around $1950 to $2000. That’s where resistance comes in on gold and again, if we go back, you can see that was also a very significant point for the dollar. Remember, they’re often negatively correlated so I don’t want to fight that resistance point on gold and I don’t want to fight that support point on the US dollar. All signs pointed to us getting out of the gold trade so we did a couple of months ago. Let’s take a look now at gold producers. This is not gold bullion. These are the producers and it’s represented by the iShares XGD ETF, which is just a global producer index ETF. You can see that it’s not at all the same pattern as gold bullion.
In fact, it’s been in a down trend, a channel, but again, the producers hit the top of the channel and immediately started to roll over. So they are following gold’s relative pattern even though the longer term look is more of a down trend rather than a sideways period. Nevertheless, there was a resistance point, it hit, and it failed. So you can see why we didn’t want to hold bullion and we didn’t want to hold the producers anymore when we started to see this rounding over. If we look at gold itself, bullion itself, you can see that right now anywhere between February and let’s say July, gold tends to be pretty flat. There’s no seasonal edge you can get by trading gold over the next few months. Now there could be a technical edge. If we see gold go back to that lower level, remember around 1650, that would probably be a good point to start looking at buying.
But from a seasonal point of view, there’s no indication that it would bounce from current levels on average. Gold’s future seasonality is kind of mediocre over the next few months. Now, those are some of the negatives for gold. We see bounce off of an old resistance point for gold. We saw a bounce off of an old support point for the dollar. The two are negative correlated. Seasonality is kind of mediocre. We have kind of some negatives that we just looked at. Let’s look at some positives. This is a very, very short term look at gold. This is bullion and what I’ve done here, if anybody’s familiar with my blogs and my work, I use sometimes what’s called a short-term trading model and it’s really simple. This is a daily chart. These are Bollinger bands just as a default.
Bollinger bands are simply volatility bands. When a security or the market moves to the top of the band, it means that it’s kind of at the top of its volatility range and when it moves to the bottom, it’s near the bottom of its range. Now Bollinger bands by themselves, you’ll see that sometimes when a security’s in a downtrend, the security will run along the down side of the band and you can see when it’s in an uptrend, it’ll run along the top band. So it’s not, by itself, a signal just because the security is at the top or bottom band. But if you look at it in conjunction with some other indicators, which I’ve been using stochastics, you can see here, and RSI. So we get a signal where things are oversold on stochastic and RSI then that can give us a signal if we are also, of course, running along the bottom band of the Bollinger volatility bands.
If we take a look, RSI does not always have to go to its official oversold level, which is around 30. It can land somewhere around 40. Typically, I will watch something if RSI is near 40, and it’s most definitely near that, I think it’s in the low thirties right now on the daily chart, again using the default settings, you can adjust RSI to whatever you want, but I just leave it at the 14 day default. You can see stochastics is definitely oversold and it’s been running along the bottom band for volatility. At the same time, we also have what could be a bottom head and shoulders on the daily chart. So that neck line, if I’m correct about the bottom and head shoulders look, is just being tested right now. At the same time, we have some oversold signals coming from stochastics, RSI, and the Bollinger bands.
So maybe if this test is successful, in other words, we bounce off of current levels, you could see some short-term upside on gold bullion. Not a prediction, it’s just a setup that has a decent chance of happening based on what I’m looking at here. So that’s a plus. We looked at some sort of mid-term negatives for gold, but that’s a short-term plus. Let’s take a look at what else we can see. The next thing we can look at is the gold optics. Now this comes from sentimentrader.com and the gold optics basically looks at sentiment using a number of different factors. So how bullish or bearish Smart Money, Dumb Money, retail investors and options traders and all that kind of stuff are towards gold bullion. Sentiment tends to be a leading indicator so keep that in mind.
Sometimes sentiment can remain either overly bullish, which is a bad thing or overly bearish, which is a good thing for extended periods of time. You can see that here on the left side, back in 2010, people were overly bullish for a while before gold finally peaked out. So you have to look at those other signals. You don’t just look at the optics, but it does give you some feedback that you can use in conjunction with other signals. If we go to the far right, you can see often eventually the optics is correct. It’s not an immediate indicator, but if the cluster is above the red line, that means too many bulls and over and over it usually leads us into some sort of a high on gold and vice versa. If it’s spending too much time in the pessimistic area, it usually coincides with some sort of a buying opportunity.
So where are we right now? Well, it was clustering in that sort of overly pessimistic zone. That was going back to August when I was suggesting I thought gold would go up and we’re seeing that return to normality on enthusiasm or sentiment towards gold. It’s nowhere near overbought from the optics point of view. It’s not enough bulls yet to say that it’s a crowded trade. It’s not that at all. So that’s a positive in that if gold can operate that head and shoulders breakout that we were just looking at, if it can continue that pattern and move to the upside then we could in fact see the old highs that I personally just sold out at, around 1950, hit again and maybe who knows, eventually broken out. Just keep that in mind that there are some signals suggesting that there’s not a lot of upside for gold, but maybe some short-term signals that are suggesting that are bullish for gold, at least in the near term.
Certainly the optics is not saying that we’re anywhere near an overly optimistic sentiment pattern. Now, let’s take a look at the seasonality for the producers because I only looked at the seasonality for the bullion a minute ago, and we can see that the pattern is quite different. If we are in the latter part of February, sometime around March, the producers tend to bottom and then actually go up quite a bit until the spring and even through the summer and often peaking in August. That’s a very different pattern than bullion so keep that in mind that there’s influence by the bullion patterns, but sometimes the producers themselves can do okay over the coming say six months or so. So do keep that in mind. I’m just going to now give you a bit of a summary and that is that generally speaking, we’ve got some positives and negatives on gold.
I love gold or do I not love gold? Well, let’s try to put them all together. We can look at gold and the US dollar, which typically has a negative correlation. Gold bullion and the stocks have hit certain points of support and resistance and failed at those points so that’s a negative. Sentiment is coming off of historically low levels. You just saw that with the optics so that’s a positive. Seasonality is kind of flat for the bullion, but it’s actually not bad, especially starting in March for the producers. Depending on whether you’re looking at bullion or the producers, but that’s either a plus or a minus. Then the near term chart is possibly bullish. There’s a possible head and shoulders neck line about to be tested. Hopefully it’s successful, but if it’s not, then it’s not bullish.
You have to wait for that neck line to be tested and successfully bounce. But it lines up with some other indicators like the momentum indicators in the Bollinger bands that suggest some possible near term movement. Now that near term movement may not last long. So do keep that in mind please. My conclusion of all this is point number six, which is the biggest catalyst for gold will still be the US dollar and short-term strength or not, I think that we need to see a weak US dollar. Currently that doesn’t seem to be in the charts right now. Hopefully that makes sense to you and you have to weigh the two factors. Perhaps for traders golds may be worth a short term risk on type trade, but I don’t know if the average investor should be looking at gold just yet. I know for ourselves, we have not bought into gold whether the bullion or the producers. In fact, we sold probably about a month ago, and we have no intention of getting back in just yet, FYI.
Should Goldmember Love Gold, Mr. Powers_