The gold futures contract and gold mining stocks may have topped out after a historic uptrend that lifted the yellow metal to an all-time high above $2,000. Stabilization in the world economy and its beneficial effect on the bond market predict growing headwinds for gold bugs in coming weeks, perhaps offering a buying opportunity when the dreaded second wave of the pandemic makes an unwelcome appearance this fall and winter.
- The gold futures contract may have topped out above $2,000.
- Gold miners are unlikely to post new highs until the futures contract rallies above the recent high.
- The yellow metal may offer a low-risk buying opportunity if a second wave of COVID-19 hits with lethal force this fall and winter.
Big cyclical highs posted in prior years represent major resistance levels that can take a long time to overcome, if at all. Just look at price action in big tech names that topped out when the internet bubble burst in 2000. It took more than a decade for many of these issues to complete round trips and then another few years to break out. There are exceptions, but there are also well-known tech stocks, like Intel Corporation (INTC), that have never mounted their peaks.
Psychologically speaking, gold futures and gold miners are now overloaded with weak hands who need to be shaken out to support current and higher price levels. Predatory algorithms could target this massive supply at any time but might wait until a bearish catalyst comes along or until the fourth quarter, when traders return to their desks and volume hits higher levels. However it unfolds, now is a perfect time to place stops and avoid new long entries.
"Gold bug" is a colloquial expression used to refer to people that are particularly bullish on gold. Although people differ in their reasons for being a gold bug, they commonly share a perception that the purchasing power of fiat currencies will decline due to factors such as inflation, expansionary monetary policy, and the rising national debt.
SPDR Gold Fund (2004 – 2020)
The SPDR Gold Fund (GLD) came public in 2004 and entered a strong uptrend less than one year later, lifting in multiple rally waves into the September 2011 high at $185.85. The fund then eased into a corrective pattern that carved a bearish descending triangle, finally breaking down in the second quarter of 2013. Aggressive sellers maintained control into December 2015, when the downtrend found support near $100 ($1,000 on the futures contract).
The subsequent recovery wave posted lower highs in 2016 and 2018, carving a nearly perfect descending trendline that was mounted on heavy volume in June 2019, confirming the first new uptrend since 2011. Price action completed the round trip into the prior high on July 29, yielding an immediate breakout and an Aug. 6 all-time high at $194.45. The fund has now sold off into the prior high after posting heavy downside volume that raises the odds for a long-term top.
Gold Miners ETF (2006 – 2020)
The VanEck Vectors Gold Miners ETF (GDX) came public in the mid-$30s in 2006 and entered a modest uptrend that topped out near $57 in March 2008. It sold off to $15.83 during the economic collapse and turned sharply higher, reaching the prior peak in December 2009. A November 2010 breakout posted an all-time high at $66.98 in the third quarter of 2011, giving way to a decline that failed the breakout in April 2012.
The downtrend reached the 2008 low in 2014, ahead of a 2015 breakdown that hit an all-time low at $12.40 in January 2016. The subsequent bounce stalled just above $30 in August, while downdrafts into the first quarter of 2020 found support in the mid-to-upper teens. The fund broke out above 2016 resistance in April and rolled over at the .618 Fibonacci selloff retracement after the gold reversal. This harmonic barrier should limit the upside until gold rallies to a new high.
The Bottom Line
Gold futures and the gold miners fund may have topped out after powerful trend advances, warning investors and traders with exposure to protect profits.
Disclosure: The author held no positions in the aforementioned securities or contracts at the time of publication.