Investors take a golden backstop
THE whiff of market caution from a month ago was dispersed with new rallies in the major US indices. The index charts all indicate a continuation of the uptrend towards new resistance targets.
The public seems to have brushed off the whiff of caution in favour of, if not unbridled enthusiasm, then at least an increased level of confidence. However, professional hedge fund managers and others are even more deeply committed to caution; these parties include governments.
While no one was paying attention, the Reserve Bank of India silently moved over 100 tonnes of its gold reserves from the UK to India for the first time since 1991.
The central bank also purchased 24 tonnes of gold in just four months, which is 1.5 times more than its gold purchases for all of 2023. India will now hold most of its gold in its own vaults, and that is indicative of concerns about the growing tendency to confiscate the assets of nations that fall into disfavour with the US.
China, Russia, and India, three of the world’s strongest economies, are rapidly stockpiling gold to increase control over their assets and to reduce currency vulnerability. The rapid pace at which they are accumulating gold leads some observers to ask if they are preparing for a crisis.
It is not clear if this is a crisis of an economic nature, driven perhaps by the ramping up of protectionism, or if it is a geopolitical fear that assets are at risk in what were previously safe havens.
China’s increase in gold purchase and decrease in holdings of US Treasuries are consistent with geopolitical fears. In any case, the rising price of gold reflects state buying and market unease.
The price chart of gold suggests that investors have established well-fortified lines of defence, and that the buying pressure has subsided, now that the backstop is largely completed.
Since 2020, gold traded in a broad sideways trading band between US$1,700 and US$2,130. The price breakout that developed in December 2023 moved above this resistance level, and then tested it several times as a support feature.
After March, the price moved very rapidly to reach the upside targets near US$2,560. This target is calculated by taking the width of the previous trading band and projecting it upwards.
The price chart of gold suggests that investors have established well-fortified lines of defence, and that the buying pressure has subsided, now that the backstop is largely completed.
The speed at which this target was achieved was unexpected. This calculated target is now acting as a resistance level, and the price is expected to consolidate around this level in the coming months.
It would not be inconsistent for the price to fall back to US$2,130 and create a new trading band price range. While some state-led investors and fund managers may have hunkered down, the S&P 500 charts suggest the market crowd has resumed dancing in the street without a care for tomorrow.
The S&P uptrend started in October 2023. This was broken in April 2024 with a minor retreat.
This was the original whiff of caution, which was dispelled by a breakout above the short-term downtrend line in May. The breakout led to the current uptrend and new S&P highs.
The significant feature is that the uptrend line A no longer acts as a support line. It is now a resistance feature with the potential to limit any future rise in the S&P 500.
The current retreat is simply part of the breakout trend development and not an indication of a trend reversal.
The enthusiastic crowd can send the S&P much higher towards trend line resistance.
There are currently no indications of a significant trend reversal. The retreat was a stumble in the uptrend. There are no technical or charting methods which can be applied to set upside targets for the S&P. Exposure to this market is treated as a trading environment and protected by a trailing stop loss.
The whiff of caution remains, with a portfolio rebalanced to hoard strong assets like gold, and which also takes a cautious participation in the short-term rallies in the equity markets.