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July 21 Was A Significant Day for the Gold Futures Market

Barchart - Sat Aug 6, 2022

Technical trading patterns can offer clues about the future path of least resistance of futures markets. In gold, we may look back on July 21, 2022, as a watershed event as the nearby futures contract stopped declining just above a critical technical support level. Moreover, the price action on that day was a sign that the bearish trend bent and the path of least resistance turned higher. 

Gold’s bull market began in 1999 when the price fell to $252.50 as the United Kingdom sold half of its gold reserves. Even though the UK is the worldwide hub of the international gold market, other countries did not follow the British. Over the past years, governments have been net buyers of the precious metal. 

Since the 1999 bottom, gold has made higher lows and higher highs. Each significant selloff has been a buying opportunity for gold enthusiasts. Bull markets rarely move in straight lines, and gold is no exception. Gold is a currency and a commodity, occupying a unique position in the world’s financial system. 

Over the past weeks, gold’s most recent correction from the March 2022 high may have ended. 

Gold corrected from the high

After reaching a record high of $2,072 on the continuous COMEX futures contract in March 2022, gold reversed and corrected to a low of $1,679.80 on July 21, 2022. 

The chart highlights the 18.9% decline as gold corrected from early March through late July.  

A bullish key reversal pattern on July 21, 2022, stopping short of a challenge of the March 2021 low

A bullish key reversal occurs when a market trades to a lower price than the previous period and closes the session above the prior session’s high. 

The shorter-term chart highlights gold’s bullish key reversal pattern on July 21, 2022. 

Meanwhile, the $1,679.80 continuous contract low on July 21 was above the March 2021 $1,673.70 bottom. While gold put in a bullish reversal, it also made a higher low. Since July 21, gold has made higher lows and higher highs, probing over the $1,800 per ounce level and settling above $1790 on the active month December COMEX futures contract on Friday, August 5. 

Three reasons why gold is likely to continue to make higher short-term highs

Three factors support a continuation of higher lows and higher highs in the gold futures arena:

  • The technical reversal and higher low are bullish, showing buyers have overwhelmed sellers at the most recent low. 
  • Inflation measures, the consumer and producer price indices, continue to point to the highest level in over four decades. The latest GDP data from Q2 2022 was the second successive quarterly decline, the textbook definition of a recession. The contraction in the US economy could eventually curb the Fed’s enthusiasm for battling inflation with higher interest rates. 
  • Every correction in the gold market since 1999 has been a buying opportunity. Trends are always our best friends in markets, and the long-term path of least resistance in the gold market has been bullish for over two decades. 

Bull markets rarely move in straight lines, and corrections can be nasty. In gold, the recent selloff from the all-time high in March did nothing to negate the bullish trend that has been intact since the 1999 low. 

Look for confirmation from gold mining shares

Gold mining shares tend to provide leverage to the gold price as miners invest significant capital in extracting the metal from the earth’s crust. 

Gold mining stocks often outperform the metal’s percentage gains on the upside and underperform during corrections. Therefore, mining shares can provide clues about the strength of gold rallies and corrections.

GDX and GDXJ are diversified ETF products

The VanEck Gold Miners ETF product (GDX) and the VanEck Junior Gold Miners ETF product (GDXJ) are diversified market ETFs that hold shares of the leading senior and junior gold mining companies. GDX and GDXJ mitigate some risks of owning or trading individual gold mining companies, such as management and specific mining properties. 

The most recent top holdings of the GDX product include:

At the $26.28 level on August 5, GDX had nearly $10.758 billion in assets under management. The ETF trades an average of more than 24.8 million shares daily and charges a 0.51% management fee. The most recent rally in the December COMEX gold futures contract took the price from $1,696.10 on July 21 to $1,808.40 on August 4, a 6.62% rise. GDX rose from $24.38 on July 25 to a high of $26.93 on August 2 or 10.5%. Meanwhile, during the correction from the March 2022 high, gold dropped 18.9%, and the GDX fell from $41.60 in mid-April to $24.38, or 41.4%. The senior gold mining shares underperformed gold during the correction and have slightly outperformed the metal futures since late July.

The top holdings of the GDXJ product include:

At $33.74 on August 5, GDXJ had over $3.687 billion in assets under management and traded an average of over 8.33 million shares daily. The junior mining ETF charges a 0.52% management fee. 

When gold fell by 18.9%, the GDXJ product dropped from $51.92 in mid-April to a low of $28.88 in July, or 44.4%. The most recent rally took it to a high of $34.44 on August 4, a 19.3% rise. The gold mining ETF products underperformed gold during the correction. During the recent rally from the July 21 low, they outperformed the metal on a percentage basis, validating the bullish path of least resistance.

Gold put in a bullish key reversal on the daily chart on July 21, reaching a low above the March 2021 bottom. The long-term trend suggests that gold is back on a bullish path in early August 2022, and gold mining shares support further gains.  

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.