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Which Way Will Gold Break?

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·6 min read
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Gold’s selloff has hit extreme levels. Is it turning? … copper has been plunging on recession fears … have prices fallen too far, too fast?

You know that feeling when you’re stopped at a red light, eyeing the crosswalk countdown, itching to gun it through the intersection when the light finally turns green?

That’s a bit how it feels for gold investors right now…with one twist.

While waiting for the light finally to change, a group of street-toughs has been smashing your car with baseball bats.

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After a run earlier this year that saw gold’s price approach its March 2020 all-time high of $2,074, the yellow metal has fallen hard.

As we noted in the Digest two weeks ago, this collapse has dropped the price almost all the way to a critical long-term support level.

Chart showing gold dropping to near a multi-year resistance level
Chart showing gold dropping to near a multi-year resistance level

Source: StockCharts.com

If gold falls through this support level, investors need to be very careful.  As you can see in the chart above, there’s no new, major technical support for miles.

On the other hand, if gold can bounce off this level, the light will finally change to green, and investors could rally away from their current beating.

To help understand this dynamic, let’s look at gold’s RSI.

***The poorest, longest stretch of bad RSI in years

“RSI” stands for Relative Strength Index. This is a momentum indicator that measures the extent to which an asset is overbought or oversold.

When an RSI reading climbs above 70, it typically points toward overbought conditions. When it dips below 30, that usually corresponds with oversold conditions.

When markets become too overbought or too oversold, they tend to reverse dramatically in the opposite direction.

You might think of it like a rubber band zooming across a room after being stretched toward the limits of its elasticity.

Recent gold RSI levels have reached their lowest readings in three-and-a-half years. On top of that, these readings have remained at such low levels for a duration that clocks in as the longest of the last three-and-a-half years.

You might have trouble seeing this on the chart below, but that’s what it’s showing you.

Chart showing gold's RSI levels at the lowest point in 3.5 years in recent weeks
Chart showing gold's RSI levels at the lowest point in 3.5 years in recent weeks

Source: StockCharts.com

Let’s zoom in to see this better…and why there’s reason for hope.

Below, we’re looking at gold’s price chart and RSI over the last six months.

In the price chart, notice gold trying to steady itself. In the RSI pane below, notice two things:

One, the sub-30 readings that have lasted for practically all of July.

Two, the fact that the RSI is now pushing upward and just barely poking through that key level of 30.

Chart showing gold trying to carve a bottom while its RSI is trying to push out of rock-bottom levels
Chart showing gold trying to carve a bottom while its RSI is trying to push out of rock-bottom levels

Source: StockCharts.com

When we see the RSI angle tick up like this from such low levels, at the same time that price is steadying, that hints at bullishness.

If you’re a conservative investor, it’s too soon to pull the trigger on this trade… But that crosswalk countdown is in the single digits, and the street-toughs appear tired.

***If you’re skeptical of a gold breakout following months of disappointing price action, you’re not alone

But such disappointments aren’t unusual. Here’s our macro expert and the editor of Investment Report, Eric Fry, explaining:

The yellow metal is barely registering a pulse at the moment. Most of the wax figures inside Madame Tussauds museum seem more vibrant and lifelike.

But that’s simply how gold behaves from time to time. It “does nothing” for such extended periods of time that investors begin to doubt it could fog a mirror.

Gradually, they turn their back on the comatose metal and leave it for dead. But that’s usually about the time it comes to life.

We’ll keep you updated here; the next week of price action will be important to watch. 

***Meanwhile, another metal has seen its price destroyed over the last four months

Regular Digest readers know that we’re bullish on copper’s mega-growth story. Much of our enthusiasm is due to research put together by Eric.

As he’s pointed out, all things “electrical” are hugely reliant on copper:

Quite simply, copper is a great conductor of electricity, and if you just look around, you can see the world is going electrical.

This is fueling what I see as a battery metal “rush” that will push prices higher for copper and other metals electric technologies require.

Earlier this year, we highlighted research from Goldman Sachs’ Chief Commodity Strategist, Jeff Currie. He’s on the same page as Eric.

In an interview on CNBC, Currie discussed the huge opportunity in copper:

Copper is the strategically most important commodity out there. We like to say “copper is the new oil.”

Inventories are dropping like a brick. Inadequate supply already. And we haven’t even started to decarbonize the world.

Copper is the one that really benefits from that story.

That might be true, but you wouldn’t know it by looking at copper’s recent price.

As you can see below, copper hit its latest high in early March, bounced around for a couple months, then imploded. It’s now down about 33% from its March peak.

Chart showing copper's price falling off the cliff
Chart showing copper's price falling off the cliff

Source: StockCharts.com

Why, exactly?

***What you’re seeing is panic based on fears of a global recession, which threatens to kneecap demand for copper

Copper isn’t just used in electrical goods. It’s also crucial to the housing sector, as it’s widely used in household wiring. It’s also in coins, heat conducting, fertilizer, brass, bronze…it’s even used in certain fungicides.

Given this multi-purpose use, copper is often seen as a gauge of global economic health.

Today, global economic health is deteriorating, and fears are that it’s going to get worse. Cue copper’s crashing price.

From Financial Times earlier this month:

Copper has dropped vertiginously since its price hit a record high above $10,600 a tonne in March, when the market was convulsed by concerns that Russia’s invasion of Ukraine could disrupt already tight supplies.

Now, the market’s gaze has flipped to fears that aggressive rate hikes by central banks, rising Covid cases in China and the prospect of Russia cutting off European gas will hit demand for copper and other commodities…

On Friday, Rio Tinto, one of the world’s biggest copper producers, warned of a darkening outlook for the global economy, citing the “increasing risk” that rapid rate rises dent US demand and the “considerable headwinds” facing China’s recovery from pandemic lockdowns.

***But are fears overblown?

Last week, Freeport-McMoRan Inc (FCX), the world’s largest publicly traded copper miner, posted lower-than-expected earnings.

But FCX’s CEO, Richard Adkerson, said: “There has been, to date, no significant impact in physical demand (for copper). Today’s market is tight.”

What that means is the 33% selloff in copper is purely based on fears of the future, not fundamentals of the present.

So, first, the demand freefall these bears envision might not even materialize – at least to the degree feared. But even if it does, this price-selloff is planting the seeds for another bullish leg higher.

Here’s why, from Reuters:

[Freeport-McMoRan] noted that current prices of copper are insufficient to support new mines, which is expected to worsen a tight global supply of copper.

Prices have fallen so far, so fast, that miners will now stop looking for new copper deposits until this imbalance corrects itself.

But keep in mind Adkerson’s comment: so far, there’s been no significant drop in demand for copper.

So, unless a global recession actually strikes – and strikes soon – prices are artificially low relative to today’s actual supply/demand balance. And that could set up a reversion rally.

***On this note, let’s look at copper’s RSI to see how overblown this recent selloff has been

Just like we saw with gold, the copper RSI is painfully stretched to the downside.

Below, notice how copper’s RSI has been below 30 since late June. It’s just now flirting with a push above 30, though the action is more “sideways” than “up.”

Chart showing copper's RSI spending weeks below the key level of 30
Chart showing copper's RSI spending weeks below the key level of 30

Source: StockCharts.com

Here again, it’s too soon to declare a new bullish trade. But the entire copper situation is out of whack. And we’re seeing the first clues that price might be reverting higher to take pressure off this imbalance.

For now, just keep your eyes on it. We’ll obviously update you here in the Digest.

Have a good evening,

Jeff Remsburg

The post Which Way Will Gold Break? appeared first on InvestorPlace.