Gold broke through declining trendline in late November, came down to the 50% correction line, and bounced back up.
Where are we headed?
2020 has mapped out a very exciting story for gold. The short-term bear market over the last few months has placed doubts in the heads of many investors, but it looks like the fundamentals are finally shaping up to push us up and out.
Last week, gold bounced back up to the declining trendline with RSI divergence. RSI (relative strength index) is a momentum indicator used to analyze when assets are overvalued or undervalued. On the chart below, the RSI values between November 23rd and December 1st suggest that gold was undervalued. The RSI divergence (shown by the red lines) indicate rising bullish momentum.
Is this the end of the bear?
The bull case is also showing itself as gold continues to retest both the declining trend line and the .382 fib. If gold stays above the trendline and finishes out this week close to 1860, we could be looking at a strong case for rising prices moving into early 2021. This upward pressure has a good chance to stop the bleeding and finally kick the bear out of the way.
To summarize, here are the three fundamentals supporting the short-term bull case for gold:
- Retesting (and staying above) the declining trend line
- RSI divergence between November 23rd and December 1st
- Historical patterns of gold hitting a seasonal market bottom in November and December and then turning around
Price action in recent weeks certainly point to a bullish outlook, although we must consider the possibility of a continued short-term bear market with even lower prices. If gold again pushes below the declining trend line and the .382 fib, the next downward push could send prices to 1700.
What keeps pushing the equities markets higher?
The stock market continues to shock the system with all-time highs and record returns, even through the worst pandemic in 100 years. Unfortunately, current stock prices do not reflect the health of the economy, but rather the amount of stimulus the Fed has pumped into the system. The government prints money, equities reap the benefits, and everyone is happy. That is, until we start to realize the impact of currency devaluation.
With the current outlook for government spending and increased inflation in 2021, we could see the Dow continue to push far past its all-time highs. Gold and equities are traditionally viewed as uncorrelated, meaning a rise in equities would be bad news for gold. However, we find ourselves in a unique situation where the fundamental forces supporting the Dow will also push gold higher.
There is no ceiling for equities because there is no floor for the dollar. This is great news for gold in the long-term, but equities’ heyday will eventually come to an end.
The equities markets are going to adjust with a weakening currency just like the precious metals markets, though to a lesser degree. Gold reacts heavily to currency devaluation, which is one of the primary reasons gold has significantly outperformed the S&P 500 in the last 20 years.
How should l react?
It appears that everything is going to perform well in the first quarter of 2021. The question we need to be concerned about is: why? The answer will allow the investors to enjoy short term gains while also putting themselves on the right side of the long-term fundamentals.
If increased earnings were the reason for higher stock prices in 2020, everyone should throw their money into those stocks, sit back, relax, and get rich. Unfortunately, the reason stocks are soaring is because the cost of money decreased to almost zero. Now is the time to investigate alternative investments to hedge against currency devaluation and market volatility