Market Sentiment Still Supporting Higher Gold Prices - ONE-TWENTY TWO: Trading Financial Markets

(This is an excerpt from an article I originally published on Seeking Alpha on February 22, 2016. Click here to read the entire piece.)

Sometimes the test of a change in sentiment is not in the pace of the new trend, but instead in the behavior after that trend first gets tested.

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GLD's run-up from 6-year lows practically went parabolic before ending in a large gap down. — GLD’s run-up from 6-year lows practically went parabolic before ending in a large gap down.

Source: FreeStockCharts.com

This long-term view of the price of gold is a handy reminder of how good we gold bulls have had things since the lows of the early 2000s

Market sentiment is working in the background to support the move in GLD. {snip} The main principle is simple: if the Google Trend for “buy gold” makes a local peak concurrent with an extreme in the price of gold, then odds favor a reversal in direction. This rule applies whether gold has made an extreme move lower or an extreme move higher. {snip}

Interest in "buy gold" makes a minor peak during the last peak in the price of gold. — Interest in “buy gold” makes a minor peak during the last peak in the price of gold.

Source: Google Trends

{snip}

I have also recently noticed that the timeframe of the view matters. {snip}

The monthly view of "buy gold" in Google Trends reveals that traders could have declared a bottom in gold in November. December's weekly spike would have then served as a confirmation. — The monthly view of “buy gold” in Google Trends reveals that traders could have declared a bottom in gold in November. December’s weekly spike would have then served as a confirmation.

Source: Google Trends

{snip}

Some folks get twisted up trying to look for consistency over time in the way investors and traders assess their willingness to pay for gold. I addressed this in my critique of the “Golden Dilemma.” {snip}

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The volatility index has struggled mightily to push past the intraday high of 2012 even as market fears have presumably skyrocketed.

Source: FreeStockCharts.com

I have lately closely watched the market’s expectations for rate hikes from the Federal Reserve. {snip}

The market's rate expectations have essentially collapsed in less than a month — The market’s rate expectations have essentially collapsed in less than a month

Source: CME Group Fedwatch

Another interesting development is the gold to oil ratio. {snip}

Gold has soared in value relative to oil to an all-time high.

Source: Ice Benchmark Administration, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars [GOLDPMGBD228NLBM], retrieved from FRED, Federal Reserve Bank of St. Louis, February 21, 2016.
US. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma [DCOILWTICO], retrieved from FRED, Federal Reserve Bank of St. Louis, February 21, 2016.

Traditionally, gold would be considered “over-valued” at such lofty levels versus oil. {snip}

United States Oil (USO) has fared a lot worse than GLD recently. USO has also yet to generate a convincing bounce off all=time lows.

Source: FreeStockCharts.com

Even if gold cannot help pull oil out of its funk, it may already be supporting other major commodities. {snip}

Iron ore has soared recently off major lows.

Source: Business Insider Australia

Like oil, the market dynamics for iron ore are much different than gold. Iron ore has been trapped in a self-reinforcing spiral of over-supply. {snip}

Click image for a larger view…

Gold has not led commodity prices higher since 2011. Could 2016 finally break this losing streak?

Source: U.S. Global Investors

Finally, from a technical level, GLD can fall all the way to $109 or $100 before I start to worry about another false breakout for GLD. {snip}

Be careful out there!

Full disclosure: long GLD, long SVXY

(This is an excerpt from an article I originally published on Seeking Alpha on February 22, 2016. Click here to read the entire piece.)

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