The record-setting bull run in the gold market has seen price action now go “parabolic.” In trading terms, that means prices are moving nearly straight up. Today, June Comex gold futures (GCM25) reached a record high of $3,509.90 an ounce. Intra-day gold futures price moves have topped $100 just recently.
Parabolic price moves are a rare occurrence in markets, and history shows that such moves can be the final stage of a mature bull market run. Traders also call such price action a “blow-off top.”
Veteran market watchers know the answer to the following question: When is a market the most bullish? It’s at the very peak in prices.
The Relative Strength Index for June gold futures read 79.18 as of this writing on Tuesday morning. Any RSI reading above 70.00 suggests a market is overdone on the upside and due for at least a good downside price correction very soon. Importantly, RSI is also showing bearish divergence. That means that as gold prices this week have skyrocketed to record highs, the RSI has not seen a move to a new high. RSI levels in February and March were higher than those seen this week. The slow stochastics indicator is also showing bearish divergence for gold this week.
I am arguing that the gold market is close to climaxing from a time perspective but not necessarily from a price perspective.
By that I mean prices could shoot still higher, and possibly much higher, in the coming days. However, the bigger daily price moves suggest time is running out on this very mature bull market run.
Longer-term buy-and-hold gold traders and investors should not be too worried. Time and history are on their side. While this particular bull move may be near its end, more bull market moves will develop in the months and years ahead to propel gold prices to new heights.
But for the shorter-term speculators, especially those that came to the party late, their heady days may be numbered. Gold prices have mostly taken the escalator up, but when a blow-off top develops, prices often take the elevator down.
Gold Fundamentals Are Still Strong, But…
There is still keen risk aversion in the general marketplace that is presently powering the gold market rally and may continue to do so for a while longer. However, futures traders tend to factor in extreme-case scenarios for an expected major fundamental event. This is likely the case for the present global trade tensions that are highlighted by the U.S.-China trade war. Gold traders have factored into prices a worst-case scenario, including the increased likelihood of a global economic recession. Yet, odds are not high that a worst-case outcome from this situation comes to fruition.
The other bullish element working in gold bulls’ favor is the rapidly depreciating U.S. dollar on the foreign exchange market. The U.S. Dollar Index ($DXY) this week fell to a three-year low and is presently in a downtrend. Gold and the USDX generally trade in an inverse relationship, even though the greenback historically has also been a safe-haven asset. However, in recent months, there has been increasing discussion that many global economies, including China, are working to move away from having significant portions of their sovereign reserves based in U.S. dollars or U.S. Treasuries. That’s worked in gold’s favor as central banks have been snapping up more gold. If the USDX continues to trend lower, the bull move in gold may indeed be extended.
How to Play Record Gold Prices
Despite the early warning signals of a topping process in the gold market, speculative bears would be fools to stand in front of this presently steaming locomotive. Naked shorting the gold market at present could have disastrous consequences for a trader.
Those shorter-term traders wanting to have a play in this potentially climaxing price move in gold would be better off purchasing out-of-the-money put options on gold futures. However, the premiums on gold futures options at present are very high due to the bigger daily price moves and higher volatility.
Tell me what you think. Email me at jim@jimwyckoff.com
On the date of publication, Jim Wyckoff did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
