Is Gold Resting Or Failing?

1.) OIL – I commented on May 21 that even though there may be a structural bid being placed under crude, the intermediate term is still signaling lower highs. The first lower high was put in on April 30. What else is interesting about that time? Well, just two days later, the Economist ran this cover: "Why oil prices are still not yet high enough?!" Really? As I know I've pointed out in the past, major magazine covers can often signal an upcoming contrarian move. And this one was almost perfect. So far, that remains the case. On April 30, WTI crude hit a high of $113.43. This morning it is trading at $89.70. If this level holds, it will close below trend for the first time since last year. Can it reverse and make upside tests? Of course. But breaking and holding below trend is a significant issue for an asset. Given those signals and the infamous magazine cover history, the pressure on oil is likely still down with $85 as near-term support.

2.) 1974 – Do you remember? Gold does. Back then, gold spent the early part of the decade absolutely exploding higher after the United States officially broke from the gold standard. Inflation was ripping. Oil prices were surging. Confidence in government and central banks was deteriorating. Sound familiar yet? Gold went from roughly $35 an ounce in the early ’70s to almost $200 by the end of 1974. But then came what no one seems to remember. Gold got wrecked! From the December 1974 peak near $195, gold collapsed all the way to roughly $100 by August 1976. That was about a 47% to 48% correction depending on the data source you use. And it took roughly 20 months for the correction to finally finish. These days, you’re likely to hear someone explain why gold can never go down because deficits, because inflation, because central banks, because geopolitics, because fiat currency, because the end of civilization. I suppose all of those could be true. Back then, the 1974 peak was not the end of the gold bull market. It just needed time to digest those massive earlier gains. That brutal correction into 1976 turned out to be the setup for one of the most violent upside moves in market history. History doesn’t repeat, but it often rhymes mostly because human behavior repeats constantly! So, yesterday I said gold wasn’t likely ready to rocket upward just yet, and that likely remains true as long as real rates move higher. But that condition can, and probably will, change. Could gold just be resting for its next leg higher? Maybe. If this really is rhyming with the mid-1970s, then the current correction in gold might not be the end of anything. But if it does rhyme with the 1970s, a ~50% correction from the highs would be about $2750 and last until about Sept 2027. Imagine the depths of despair for gold investors in a scenario like that. Imagine how they felt at the 1976 low. Maybe you were there! I don’t know how this ends, but markets bottom on despair. We don’t have despair in this market yet, which is why I was being immediate-term cautionary on gold. Because the above scenario could play out and still be in a secular (long-term) bull market.

3.) VIX – the “Vol crush” has continued, which, of course, markets like. This is also true for bond volatility as the MOVE Index closed below 70 for the first time since April 15. Why does something go up? Because it went down. Sounds simple, I know. But the randomness of markets works that way sometimes. Right now, the trade range of VIX is very tight at 15-17.40, which signals a low and decelerating volatility of volatility. A “pop” upward would be expected to stop near 17.50, which is still pretty muted. So, are we headed for a “calm” summer of slowly grinding higher markets?