Perplexing? Well, the reality is that one usually is both bullish and bearish on gold and any other asset.
There are only two other categories of people: permabulls and permabears, who are married to a specific outlook, which makes any analysis pointless. After all, if you already know what the outcome is going to be, why even bother.
One is bullish and bearish at the same time because the markets don’t move up or down in a straight line. One can, therefore, expect prices to move first up, then down, then up again, and then down again, and so on. Different probabilities of happening can be attributed to different price moves as well, as different sizes of given price moves might appear likely, but the overall principle remains the same – depending on the timeframe on which one focuses, they can be bullish and bearish at the same time.
I’m bearish for the following weeks and months, but I’m bullish for the following years. And I’m rather neutral in terms of days.
The reason why I’m providing this kind of introduction is to lay the foundation for the interpretation of the following chart from UBS (thanks for the chart, Simon).
The title of the chart states that the “Fed policy easing is positive for gold”, and there are two charts. The upper chart is the same line that you can also see on the lower chart, that’s not really visible there (marked with yellow).
Someone preparing the chart’s description added their own interpretation to it, and the point of my intro to today’s Gold Trading Alert is to help you see what it means and what it doesn’t mean. Without knowing on what term, the person making this bullish statement is focusing, it’s impossible to say what the real implications are. Are they bullish regarding tomorrow’s session? Or next year?
Fortunately, they provided the charts so we can see what’s really going on.
Heh, looking at it, one might as well say that the Fed policy is negative for gold as the last recorded piece of data is below 0.
But ok, I get the point, most of the time, the effect was positive, and the description on the right side of the upper chart emphasizes what the real implication is.
Taking into account data from both: bull and bear markets in gold (since 1980), we see what gold usually gains about 9% over 2-3 QUARTERS from the first rate cut.
What’s not said (and that’s not that important for us, but I’d like to say it as it’s interesting) is that gold then tends to plunge, more than erasing those gains.
What’s also not said – and what’s very important for us – is that gold tends to do nothing for the first 2-3 months after the rate cut, with the impact being mostly negative in the case of the 2-month period.
The rally really picked up four months after the first cut.
This means that if we get a rate cut next week, the bullish implications are likely to kick in… Somewhere in mid-January 2025, with a possibility of seeing some strength in late December.
And as far as the next few months are concerned, we either get no implications or somewhat bearish ones.
Now, the line that I’ve been talking about is based on the dataset that started in 1980. There are also lines based on shorter datasets that are visible on the lower chart, but they are not really important – perhaps even misleading.
The orange, blue, and grey lines are single-time cases, not averages or medians from entire periods. In other words, it doesn’t mean much – since the 1980-now median is much more bearish than those picked cases, there were also cases where gold performed worse. The light blue one is the median based on the 2000-now period, which is the period where gold was mostly rallying. If we see a major peak right now (as we’re likely seeing a major bottom in the USD Index), this analogy doesn’t necessarily apply. The same with a major top in stocks – seeing it would likely push gold lower, just like it did in 2020 and 2008.
The bottom line is that one should be careful while reading statements about something being bullish or bearish for a given market and be sure to check what term does it regard, and what kind of dataset supports a given outcome or scenario.
Finally, this analogy doesn’t invalidate my outlook for the precious metals sector. Sure, gold could rally next year, but it’s still likely to decline this year – and junior mining stocks are likely to decline much more.
As far as the current price action is concerned, gold price moved up right after the PPI and initial jobless claims data was released and after the ECB rate cut. The rates were cut as expected, so it’s not much of a deal.
The breakout that we’re seeing here is not confirmed, and it might be invalidated shortly (gold is already moving back down). No major data is going to be released tomorrow, so the markets now have the time to digest what happened today and react to it. So far, the move is very initial – we didn’t even hear the opening bell in the U.S. markets yet. The USD Index and the S&P 500 futures are flat.
All in all, nothing really changed since yesterday and a big decline in junior mining stocks remains to be the likely outcome for the following weeks and months.
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Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief