Commodities Weekly: Is Gold Ready to Shine Again?

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Gold has been one of the last places we have wanted to put our money over the past eight months, second only to Bonds.

Other areas of the commodities space, like Base Metals, Energy, and Ags, along with risk assets in general have experienced an explosive rally. While Precious Metals have gone nowhere. But are we starting to see signs that this could be changing?

Last week we pointed out that Lumber had reached our target and could be due for a pullback. And we’re seeing that play out.

The previous week we noted that other procyclical commodities within the Base Metals group were also reaching our targets and testing areas of potential resistance. And like Lumber and so many other risk-assets, they remain trapped below key levels of overhead supply.

So while much of these former leaders appear to be entering corrective periods, or sideways trends, we're looking to put our money to work in areas that are trending... And one of those places within the commodities complex that has our attention is Gold and its shiny peers.

When we consider the recent outperformance from defensive areas within other asset classes, it would certainly make sense to see precious metals take the driver's seat here.

In today's post, we're going to examine the following question: After a year of consolidation, is it finally time for Gold to shine?

Let’s start with some charts that show where it's been, where it is now, and where we think it's headed. First up is a chart of Gold: 

The above chart is what we've been calling our"alternate view" of Gold... but it's now become our "primary view."

Instead of anchoring resistance at the highs from the 2011 blow-off top (click here for our initial "primary view"), the market has spoken and made it clear that the real level of interest we should be focused on is at the multiple price peaks from 2011-2012 around 1,800.

The more times a level is tested the more important it becomes, and it’s clear that 1,800 is the line in the sand for Gold. With that as our outlook, the recent violation of these key former highs has the makings of a bear trap, or “bull hook” for the yellow metal.

What we call it doesn't matter. What does matter is that this epic failed breakdown has sparked a rally that's reclaimed the 1,800 level and potentially kicked off a fresh leg higher.

We are long Gold against this critical former resistance zone with a 3-6 month target just above 2,250.

But it’s not just Gold in USD that’s catching a bid. We’re seeing similar strength when priced in other currencies as well.

Here’s a look at Gold denominated in some of the world's most important currencies:

While it's about 2% off its key 2011 highs in dollar terms, when we price the shiny metal in Yen, Euro, or Sterling - they're all well above those critical former highs.

Last year we published a post whereby we took a detailed look at Gold in various currencies. Not only were we highlighting the broad strength we were seeing from the precious metal back then but it was also a nice inside look at our weight of the evidence approach, and how we analyze its performance in currencies other than the US Dollar in arriving at our overall outlook.

At the time of this analysis last February, Gold was above its 2011 highs in all but 5 of the 18 major currencies we track it in. It was also making fresh highs in just about ALL of these currencies across just about EVERY timeframe. Long story short, our bullish view on the space back then was predicated on many of the same developments we're seeing once again today...

Here is what that table looked like back then (click here)... and here is what it looks like now:

Once again, we have some very bullish near-term strength with new monthly and quarterly highs across the board. And from a more structural standpoint, Gold is now back above those crucial 2011 highs in EVERY currency except for the Hong Kong Dollar $HKD and good old king dollar $USD itself.

But they're just a stone's throw away from joining the rest as they each sit just about 2% below these key levels. Here's a look:

These are the two biggest laggards in our universe of Gold priced in various currencies. That's right... these are the worst-looking charts from the above table!

And I don't know about you, but we'd be buying these base breakouts all day. The takeaway here is simple: if this is as bad as it gets for Gold right now, then things must be pretty damn good.

Now let’s visualize the relative performance from precious metals through a bubble chart:

On the y-axis, we anchor from November 6th, 2020 when procyclical commodities like Crude Oil and Copper began to rally. While on the x-axis, we're simply looking at the percentage change over the last month given the recent strength out of precious Metals. 

The chart shows that since the more economically sensitive commodities have taken the lead, Gold has performed the worst amongst Precious Metals with a negative return. But over shorter timeframes - illustrated along the x-axis, this dynamic appears to be changing as leadership shifts in favor of Silver and Gold.

 Notice that not only has Silver lead the way (which is very bullish for precious metals) with Gold close behind but Platinum has fared the worst over the last month. The one PM that clearly had the best performance since cyclicals led the commodity space also had the worst performance over the last month. This behavior speaks to a potential rotation out of those procyclical commodities and into the more defensive contracts, like Gold.

It was less than a year ago when Gold ripped to new all-time highs and appeared to have finally completed a decade-long base breakout. Although, that didn't turn out to be the case and since then it's been nothing but opportunity cost.

But... given the recent failed breakdown - or "bull hook" and subsequent upside resolution... along with the broad strength from Gold priced in other currencies... and of course, the overall shift toward more defensive assets which supports all this evidence of a potential rotation into Precious Metals and it sure looks like the tide is changing for these shiny metals.

Thanks for reading. As always, let us know what you think, and be sure to download this week’s Commodity Report below!