Two Ways to Play the Imminent Gold Bull Market

Two Ways to Play the Imminent Gold Bull Market

The July non-farm payrolls data in the US came out last Friday. The Bureau of Labor Statistics reported an addition of 943,000 jobs, beating the market consensus average of 858,000.

Unemployment fell from 5.9% to 5.4%, also beating the consensus estimate of 5.7%.

Oh, wow, I thought, the patient that has been on life support for over 10 years is stirring again!

There is talk that the Federal Reserve will rein in quantitative easing (QE).

In other words, let’s get ready to switch off the life support system.

Such is the desperate hope for an economic recovery from the central bankers, governments, and policymakers that they will rush to alert the public that it is coming.

Each time the market reacts the same way. They feed on it hook, line, and sinker.

It has become a kneejerk reaction.

They head for the gold futures market and hammer it down.

So gold took another massive beating last Friday in the US markets on the back of the non-farm payrolls data beating market consensus for the month of July.

Have a look at the chart below of the price of gold in US dollar terms, with the 20-day, 50-day, and 200-day moving average trend lines:

Gold Price Chart - Price of gold in US dollar terms

Source: Reuters

[Click to open in a new window]

Before last Friday, the price of gold was almost entering into the next leg of the bull market.

However, that plunge on Friday brought it down by US$40/oz. There was another smackdown of almost US$100/oz on Sunday evening just before the Australian markets opened.

It was like a one-two knockout.

Is gold entering a bearish season once again?

Take a look at the trend lines over the last five months.

Something is different this time.

The 20-day moving average is at $1,795/oz, 50-day moving average is $1,810/oz, and 200-day moving average is $1,835/oz.

The 20-day moving average line is still heading up like it did in March 2021. This means the short-term trend is still positive. It is closing in on the medium-term 50-day trend line from below.

If the price of gold can climb back to US$1,830/oz and hold this level, the bull market remains in play.

It seems like we are not too far off actually.

I expect that the US Federal Reserve will reveal that they will not follow through with any action when they meet at Jackson Hole on 26–28 August.

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They know it, the economy is so heavily debt-laden that taking away the debt topples the entire thing.

So the next gold bull market could just be a few weeks away.

Meanwhile, how is gold doing in Aussie dollar terms? Take a look at the chart below:

Gold Price AUD Chart

Source: Reuters

[Click to open in a new window]

The bull market appears even closer over here. The short-term trend line is closing in on the long-term trend line from below. The bull market that started in early March is strong.

However, the Aussie dollar gold price is not a leading indicator. It is derived from the movements of gold in US dollar terms and also the exchange rate.

Our economy is under greater threat than the US, thanks to the state governments locking down at least 50% of our country. Canberra entered a seven-day snap lockdown too.

Expect the Aussie dollar to keep falling, fuelling a bull market in gold for us.

I also want to present one more chart on the price of gold.

Note that the price of gold is quoted in US dollar terms. However, the US dollar does not have a constant value. But how can we estimate what it is really worth?

A popular proxy is the US Dollar Index. This measures the value of the US dollar by comparing it against the euro, British pound, Japanese yen, Canadian dollar, Swiss franc, and the Swedish krona.

So the actual price of gold is the USD-Index Adjusted price. By definition, a strong US dollar increases the actual price of gold.

So let us look at how much gold is worth using this USD-Index Adjusted price, see in the chart below:

Gold Price USD Chart Price

Source: Reuters

[Click to open in a new window]

The 20-day trend line has exceeded the 50-day trend line and is approaching the 200-day trend line. The short-term bullish trend is still intact.

Now, what does this mean to you?

Ignore the prevailing media narrative about the economic recovery and how the central banks will act soon to control inflation.

The pattern we are seeing with gold in the last five months suggests that gold is consolidating for the next bull run.

Physical gold might be worth buying now as insurance and guarding your purchasing power. The illusion of the economic recovery cannot last forever. Eventually, the debt will crush the markets.

But you can also turbocharge your portfolio with gold stocks.

Have a look at how the ASX Gold Index is performing in the chart below:

ASX Gold Index Chart

Source: Reuters

[Click to open in a new window]

The index is still trading at levels higher than the March 2021 lows of 6,000. Currently, it sits at around 6,350.

The price of gold is trading at 7% above the March lows. Meanwhile, it is only 5.1% higher for gold stocks.

Can you say, ‘good value’?

I haven’t even started talking about the falling price of oil that is coming up, thanks to OPEC announcing they will raise production.

I think I need not say anymore!

God bless,

Brian Chu Signature

Brian Chu,
Editor, The Daily Reckoning Australia

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