Gold Safety Demand Roars Back
Gold broke decisively above the widely watched $1,800 level on Friday on a weaker dollar and rising geopolitical worries involving the situation in Afghanistan. As of late Friday, gold was headed for its best weekly close in almost two months.
The return of gold safe-haven demand was in part catalyzed by Thursday’s Islamic State suicide bombing in which 85 people (including 13 U.S. soldiers) were killed. There’s now a growing fear that more attacks may be on the horizon.
This obviously has served to strengthen gold’s “fear factor” as gold attracts increasing interest from investors looking to hedge against geopolitical uncertainty. The latest pullback in the U.S. dollar index has also helped boost the metal’s safety demand.
A more salient factor behind gold’s latest rally is the clearing of the path toward a massive spending and infrastructure plan by members of the U.S. House of Representatives. According to CNBC, “The House voted to approve a $3.5 trillion budget resolution, advance a bipartisan infrastructure bill and move forward with sweeping voting rights legislation” earlier this week.
The $3.5 trillion budget bill would almost certainly be interpreted as inflationary by the market, which could actually be the bigger reason for the dollar’s latest weakness and gold’s strength. If so, gold now has a strong likelihood of being supported by both the fear factor and the inflation factor, which would be good news for the bulls.
Although the December gold futures contract still hasn’t established a higher peak above its July price high of $1,830 (a key resistance level), I’m going to roll the dice here under the assumption that this level will shortly be broken on the upside.
Accordingly, I’m placing a “Buy a Half” rating on my favorite gold ETF—the GraniteShares Gold Trust (BAR)—assuming it closes today above its 50-day moving average. This would mark the first weekly close decisively above the 50-day line since it fell under the trend line in June.
I don’t recommend loading up on this ETF, however, since the gold market remains volatile and very much subject to news-driven crosscurrents. Moreover, the Invesco U.S. dollar index ETF (UUP, my favorite dollar proxy) hasn’t yet closed below its 50-day moving average, as shown below. (A break under the dollar’s 50-day line would give us further confirmation that gold’s inflation factor is in fact improving.)
What to Do Now
Participants can purchase a half position in the GraniteShares Gold Trust (BAR) after its decisive close above the 50-day trend. I suggest using an admittedly tight protective stop by choosing a level slightly under 17.50 as the initial stop-loss on this trading position. (For this trade to succeed, gold needs to follow-through on the upside next week and close above the 18.20 resistance fairly soon.) BUY A HALF