For once, I send two emails, the first in English and the second in German.
Für einmal schicke ich zwei Emails, das erste in Englisch und das zweite in Deutsch.

Today’s email shows how I analyzed the gold market and how it eventually led to an investment. The following was published mainly in the Cockpit Newsletter, except for the trade itself, which was part of the Pilot Newsletter.

Please help me grow my newsletters and forward this email to someone who might be interested in gold, investing, or technical analysis. Thank you!

Cockpit Newsletter December 2023

Topic: Gold / Part I

Gold made a top in 2011 at 1920 USD. After several years of lackluster performance, gold shines again. The long-awaited breakout to new highs happened in mid-2020. Since then, we have seen a consolidation ranging between 1620 USD and 2080 USD.

Many commentators made the case that this attempt would succeed and push gold to new highs. There was a day when gold spiked up, immediately came down again, and closed in the range mentioned above. The monthly bar on the chart below doesn’t look nice. Such a clear rejection is not what I want to see at a breakout, but an investment bank can cause this, and therefore, it is also just one element of my analysis (which I would rate negative at the moment).

The price of gold is commonly shown in US dollars, as is the case with most commodities. However, comparing the development of the USD with other important currencies is worthwhile. The following chart shows gold in USD, Yen, EUR, GBP, and CHF. I chose the first peak of this consolidation to align all the currencies. This allows us to see quickly how gold developed during the consolidation. Gold has already broken out in Yen, GBP, and EUR. This is relevant because people think in their currency. This means that in several parts of the world, people are experiencing a positive trend, which generally also transfers to a positive sentiment towards gold. This fact should lead to further buying. This upward pressure can help gold to break out in USD and eventually in CHF.

The following chart compares gold to the 10-year real interest rate in the US and the USD. Both time series are inverted, and they move with the gold price. The orange line is the real interest rate. The relationship between the two is on and off. The close relationship has broken down during the recent consolidation. When real rates rise, investors can make money by buying interest-paying assets. This usually leads to a bad performance of gold as it doesn’t pay anything. This disconnect shows us that another more significant force could push the price of gold. It is reported that emerging market central banks have been buying for some time now and will soon have more gold reserves than the US. Another factor could be that people are worried because of the rising debt level in the USA.

The second panel shows the US Dollar. The price of gold usually performs positively when the USD gets weaker (red arrow). The USD has gotten stronger over the past few years. Nevertheless, gold traded sideways. This confirms that there are forces supporting gold despite those negative fundamentals.

The following chart shows the price of gold and the gold volatility index. The green vertical lines show instances when the volatility of gold moved through its trend line. This usually led to a positive development in the price of gold. The last time this signal happened was in September 2023. There are two options: take the September signal and believe it is still active, or wait for the current downtrend to be broken (blue line). I would probably be bullish now if the huge reversal bar hadn’t happened.

The following chart shows how some participants are positioned. The lower panel shows the positioning of commercials and large speculators. I’ll explain another time how this Commitment Of Trader Report (COT) works. Looking at the green indicator, you’ll realize that large speculators follow the price trend. In contrast, the commercials do the opposite. There are three signals: a top usually forms when the spread between the two starts to narrow (red vertical lines), a low forms when the spread begins to widen (green vertical lines), and when the upward trend of the commercials ends, a positive price trend starts (blue vertical lines). There are two blue trend lines currently active. The short-term steeper trend line is broken and gives us a buy signal. The longer-term trend line is not broken yet. If it breaks, we get the next buy signal.

In the second part, I’ll show a cycle analysis. Even though I like it when cycles support my investment case, this first part is always more important as not all financial instruments have an apparent cyclical behavior.

Summary: Gold has broken out in several currencies. The negative fundamentals couldn’t push gold down, which is bullish. The interpretation of the volatility and the COT shows some buy signals, which could be confirmed by another signal soon.

Topic: Gold / Part II

A cycle analysis consists of two to three parts. The first is the seasonality. You can think of this as the seasonal change in temperature. Some financial instruments show seasonality, and others do not. There are two different ways to calculate the seasonality. The scientific correct way is to show seasonality without the underlying trend. This is shown in the lower panel of the following chart. This analysis shows when we expect a turning point. The problem is that a turning point is sometimes in an upward or downward trend, which implies whether we want to trade it. For this reason, many market commentators show seasonality with the trend. There is always the question of how far back we want to go to analyze data. The lower panel uses all data available, while the red line only uses the price from a few years ago. The choice of how much data is correct is purely subjective. The red line shows the seasonality, which offers the best approximation. There are two red arrows and green arrows. They show statistically significant behavior in the direction of the arrow (green-positive; red-negative). Both lines are currently in agreement with a bullish market direction.

The second part is the analysis of cycles that are not one year (seasonality is a one-year cycle). I usually divide it into longer (longer than half a year) and shorter (shorter than half a year) cycles. The blueish line on the following chart shows the longer cycles that are currently active. The line consists of two cycles. Both cycles go up at least until the middle of the following year, which is bullish for the price of gold.

The following chart shows the analysis with three short-term cycles. The cycle composite pushes upwards until the end of December and will find a joint low at the end of January. Be careful when it comes to choosing an entry due to a cycle. The chart also shows a blue cycle. This longer-term cycle warns us that the January correction could be shallow or nonexistent. I will discuss how I treat that behavior for trading decisions in the pilot newsletter.

The last chart shows two neural networks (artificial intelligence). I’m incredibly cautious about using them for trading. But they give some indication of the trend. As you can see, they both move into a top in the first quarter. After that, a down cycle is expected. It is crucial to understand that the size of the up-and-down move is irrelevant. The movement of the cycles only tells us something about the market's direction, not how strong the move will be.

Summary: We currently have cycles that should push gold higher and help the gold price finally break out and climb to new highs. This could happen immediately or in the first quarter of 2024, depending on which cycles are the strongest.

February Cockpit Newsletter Part I

Gold had three cycles that made a low at the end of January (shown in the middle panel). The price action is still mixed. While gold showed an apparent reaction from the last low, the high happened on the left side of the cycle peak, which is consistent with a bear market. But every low was higher than the last. If the current price action can’t push decisively below the last low, it could be possible that the current low is the start of the next positive price move. In one of the last newsletters, I wrote that cycles could also show divergences. I marked this possibility with a blue line and the number one. Another possibility is that the next bigger cycle creates a normal low or divergence. I marked this with another blue line and the number 2. As I always say, I don’t trade from cycles alone. But I want the cycles to show me where a low could form. I’m observing what gold, gold mines, silver, and silver mines do. I need a convincing reaction from them, preferably with the support of the other tools I showed in a previous newsletter.

Part II

Gold’s seasonality shows a low in mid-March. The panel below the price shows a gray line. Whenever the gray line turns green, the move is statistically significant. We should, therefore, see a cycle low in March. This low seems important because the blue line goes to the bottom of the chart if all the price data is considered. However, if we look at the red line, the significant low is at the end of September. We must check the short- and long-term cycles for more insight.

The short-term cycles are at a low and should push prices up until the end of February. Some other methods expect another push to lower the gold price before the bull market returns. It could be that the small low in mid-February is that low. Does it make sense? Most recent lows coincided with a clear cycle low (October 2023). But tops and bottoms often show divergences. Market technicians usually show them with momentum indicators. But they also appear in cycles.

The green line shows the long-term cycle. It is the reason why I would not focus too much on seasonality.

The neural network also shows the February low, where the short-term cycles project a low. The rest of the chart is too far from what my other cycles show, so I don’t use it.

The price of gold moved up (blue trend line). At the same time, the small speculator increased their position (panel below), speculating on the breakout of the gold price. This is possible but unusual, as small speculators are often on the wrong side of the trade. It would be better to see them giving up on the trade while the price increases.

This chart shows the commercials and large speculators. We usually get a nice bull run when the blue trend lines get crossed by the brown line to the downside. This is not the case now, as the brown line rebounded from the blue line. Going through the chart, you see that we are at the top whenever the distance between the green and brown lines is substantial. The problem is that this can often only be observed in hindsight. But we currently have about the same distance as at the last top. Those two charts prefer a setback and are a contradiction to the cycles. One of them is wrong. The only way to figure this out is by closely observing the price of gold itself. When one or the other move happens, we should see an apparent reaction in the charts.

Pilot Newsletter March

Let’s revisit a few charts I showed in December (Pilot) and February (Cockpit). In my first post, I showed that gold prices in several currencies have broken out relative to the previous all-time high in 2020. A new high was missing in USD and CHF. Last week, that level was also broken in USD, and gold has stayed above that level so far. This was important because we crashed right back through the threshold the last time.

In the Cockpit, I explained that cycles can make a low with the price (number 1 in the following chart) or make a divergence (number 2). A bullish divergence is defined as if the price makes a new low (upper downward sloping blue line) and the cycles make a higher low (lower upward sloping blue line). When this happens, it is often the case that a strong move follows. That doesn’t mean this move lasts, but it is often promising. I’m not ruling out that we get a setback. The cycles project a setback over the coming days and weeks. But I hope that the new energy leads to a consolidation. The following important cycles, top and bottom, are the 18^th of April and the 21^st of May. The ideal case would be that the May bottom will be substantially higher than we are today.

The following chart shows the positioning of the large speculators in green and the commercials in brown. Whenever the gap between the two lines widens again, we are at a (short-term) low. This happened.

I explained in my last post that small speculators often position themselves wrong. That means that they don’t cause the breakout or correctly position themselves into the breakout. During the previous upmove (blue line), the small speculators increased their position (blue line in lower panel). Since then, they have been reducing their position (red arrow) while the price of gold has consolidated. They got impatient, and the breakout happened last week (green arrow). It is typical for the market first to clear the order book and then start a new trend.

The following chart shows that when the price volatility of gold breaks through the blue trend lines, a new upward trend starts. I used a pitchfork instead of the trendline. The reasoning is the same (break of the upper line of the pitchfork), but it gives a timelier signal. It could be that the blue line is more important and creates resistance. But that is not my base scenario.

A weekly price chart sometimes helps to reduce the noise. The chart below shows that the price of gold tried to break above the red horizontal line several times. The last time, it immediately fell back under the red line. Last week, we finally closed the week above that threshold, and we are still above it, which is a good sign.

I draw two blue lines. The price makes a higher high while the indicator makes a lower low. This is called a hidden divergence. It means that market participants are more pessimistic even though prices are higher. A bullish trend and people being more negative are usually very bullish. Fortunately, it happens on the weekly chart as the signal is longer active than on a daily chart. That should translate into several good weeks. That is another reason why I believe that some of the negative short-term cycles won’t be so strong.

I entered the market with a stop loss of approximately 10%. There are two price targets on the following chart. The long-term target is seen on the left side of the chart. I take the low in 2015 and the high in 2011 and double this range. That results in approximately 2800 USD. The same methodology was used for the recent range, which gives a price target of roughly USD 2550. My goal is to hold on to gold until we reach 2800 USD. But as always, I will manage the trade, and if the situation changes, I’ll inform you that I’ll sell the position in gold.

Why did I buy gold and not gold miners? The following chart shows the ratio of gold to gold miners. The blue line is the average. We are almost two standard deviations over the average. We will return to the blue line when gold miners outperform gold. Over the last two months, I was sure I would pick gold miners because we can profit from the gold story and the possible outperformance compared to gold. I see some good price action from the gold miners, but I want them to break through the downsloping trend lines. I also favor gold because I explained in the recent posts that the chart looks bullish. The opposite is true for gold miners. Some of them have lost 20% since my first post. It is usually good to buy what is going up and don’t try to pick the bottom. But I still think that miners could be an exciting investment. If the charts improve, I’ll invest in gold miners. Until then, I would instead increase the current gold position.

Summary:

Gold broke out in USD. The positioning has improved as the small speculators decreased their position. The volatility of the price of gold spiked, which is a positive sign. Short and long-term Cycles support the current move. We have a hidden divergence, and the risk-return ratio is good. If the trend stays positive, I intend to increase this position.

Outlook (in March):

Depending on the characteristics of how the price of gold trades, I will increase the position in gold. Gold and silver miners could be added if they break through important resistances. If that is the case, I’ll buy an ETF, gold miners stocks, or both.

The Trade

The price of gold is breaking out in USD. I’m starting with a 5% allocation in the ZKB Gold ETF hedged in CHF (Ticker: ZGLDHC). Even though I bought an ETF in CHF, I’ll only discuss the USD price. The price of gold is currently at around $2090. The stop loss is about 1890 USD and the target is 2800 USD.

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Please forward this email to someone who might be interested in gold, investing, or technical analysis. Thank you!

Thank you for your continued interest and support in our investment journey. I greatly appreciate your time and attention!

Disclaimer: The information in all Biber Analytics newsletters is not and should not be construed as investment advice. This is my investing journey, and I share what I do and why for educational and entertainment purposes.