Gold Update

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QE3 Playbook, Not QE1 or QE2

Having recently turned bearish on gold, I thought it's time I articulated my thesis. 

Until recently, I'd been very bullish in light of the recessionary/deflationary Coronavirus crisis.  The premise of my recent long trade lies in the fact that global monetary stimulus should lead to higher gold prices.  But despite the massive packages recently announced (and hints of more in the coming), gold has moved sideways in recent weeks, calling into question the bullish case.

When the Fed initiated QE1 and QE2 many years ago, everyone rushed into gold, expecting these money-printing measures to severely devalue the dollar. It simply didn't happen. Gold eventually topped in September 2011, followed by a partial rally to a lower high in late 2012 ahead of the QE3 announcement. But then in the absence of any signs of inflation, let alone hyperinflation, it resumed its descent until it finally printed an interim low in December 2015. Since then, gold has rallied to recoup two thirds of the losses just in time for QE4. Hence, I'm using the QE3 playbook, not QE1 or QE2, given the current deflationary environment.

Referring to last week's chart below, the pattern might seem like an in-progress cup with an inverse head-and-shoulders continuation formation at its base.  But things aren't always as they seem.  When I finally delved into the details of the wave structure, I was struck by my findings; The January 2016 - March 2020 rise recently hit a brick wall upon reaching the 78.6% retracement of the October 2012 - December 2015 decline.  For gold to prove me wrong, the $GLD must at least take out the recent highs.  But February's candle wasn't all that promising, and neither is March's candle, at least so far. 

The $GLD monthly chart as of last week:

Trade vigilantly,

Peter Ghostine (@peterghostine)

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