INTERMARKET TRENDS ARE STARTING TO FAVOR GOLD -- A WEAKER DOLLAR IS ONE OF THEM -- AND FALLING INTEREST RATES -- GOLD HAS DONE BETTER OVER THE LAST YEAR WHEN STOCKS HAVE WEAKENED -- GOLD IS TESTING MAJOR OVERHEAD RESISTANCE
A WEAKER DOLLAR INCREASES APPEAL OF GOLD... The brown monthly bars in Chart 1 show the price of gold forming a potential bottoming formation that started nearly four years ago when it hit bottom in late 2015. Since then, the price of bullion has traded between that low and a "neckline" drawn over its successive highs extending back to 2014 (brown line). Gold is in the process of testing that resistance line once again. Gold has a number of intermarket trends working in its favor. One of them is a weaker dollar. As a rule, gold and the dollar trend in opposite directions. The green bars in Chart 1 show a rising dollar between 2011 and 2015 coinciding with weaker gold. The Dollar Index, however, peaked at the start of 2017. The green down arrow shows this year's dollar peak falling far short of that earlier peak, which is a potential sign of weakness. A weaker dollar is usually good for bullion, and could increase the odds for higher gold prices. Which brings us to the second factor favoring gold (and a weaker dollar).
FALLING INTEREST RATES ARE ALSO BOOSTING GOLD... Falling interest rates are also supporting the price of gold. That's because gold is a non-yielding asset. It doesn't pay any interest or dividends. As a result, gold loses favor when interest rates are rising; but becomes more attractive when rates are falling. Like they are now. The monthly bars in Chart 2 compare the price of bullion (brown bars) to the 10-Year Treasury Yield (green bars) since 2005. The chart shows that they generally trend in opposite directions. The two most notable examples took place during 2007 and 2012. A sharp downturn in bond yields during 2007 coincided with a big upturn in gold (see arrows). [Gold was also supported by a falling stock market and weaker dollar that year]. Falling bond yields between 2007 and 2012 supported a strong gold market. The upturn in yields during 2012 and 2013, however, coincided with a big drop in gold (see arrows). Since 2014, both have trended sideways. A dip in yields between 2014 and 2016 boosted gold; while a yield rise between 2016 and 2018 kept gold prices in check. This year's downturn in yields, however, is giving another boost to gold (green circle). And pushing it closer to an upside breakout. One of the factors pulling bond yields lower is the growing expectation for at least one rate cut by the Fed this year (and maybe more). That could weaken the dollar even further, which would also be good for gold.
GOLD VERSUS THE STOCK MARKET... Gold is also impacted by the direction of the stock market. As a rule, investors favor gold when they start to lose confidence in stocks. They lose interest in gold when stocks are strong. History supports that relationship. Chart 3 compares the trend of the Dow Industrials (black bars) to a ratio of gold divided by the Dow (brown line) since 1990. A strong stock market between 1990 and 2000 resulted in weaker gold performance (falling ratio). Gold started doing better after stocks peaked in 2000; and continued to outperform stocks during that "lost decade" between 2000 and 2010 (see rising ratio). Gold did especially well during 2007 and 2008 during the stock meltdown. Gold peaked during 2011 which was two years after stocks turned up in 2009. A plunge in the dollar during 2010 and 2011 postponed the peak in gold. The big drop in gold during 2013 coincided with stocks hitting all-time highs. Stocks have outperformed gold since then (falling ratio). Until the past year.
GOLD HAS RALLIED OVER THE PAST YEAR WHEN STOCKS HAVE WEAKENED... Chart 4 compares the performance of gold and the Dow Industrials over the past year. And it shows that gold has done better when stocks have weakened. That was especially true last October when a sharp downturn in stocks (black arrow) coincided with a jump in gold. The gold/Dow ratio (upper box) jumped between last October and December as stocks weakened. The ratio peaked in January when stocks turned back up. Gold peaked in February and remained weak until the start of May when stocks weakened again (second black arrow). The May stock drop helped push gold up to a test of its February peak at the start of June. This week's stock rebound has caused gold to pull back a little. But it seems clear that the ultimate direction of gold prices will depend to a large extent on what the stock market does from here. Not to mention the direction of interest rates and the dollar.
GOLD SPDR MAY BE NEARING UPSIDE BREAKOUT... The daily line in Chart 5 shows the Gold Shares SPDR (GLD) in the process of challenging its February peak (and part of the "neckline" shown in Chart 1). After pulling back slightly this week, the GLD is bouncing again today. And it may be getting some help from lower bond yields and some profit-taking in stocks. It wouldn't take much to push it through that overhead resistance. A decisive close over its February high would constitute a major upside breakout for the yellow metal. Moving average trends are positive. The blue circle shows the 50-day average crossing over the 200-day during January (forming a "golden cross" which is a bullish pattern). And GLD remains well above both moving averages.
