An interesting article in the Financial Express reported that Gold ETFs have seen outflows rather than inflows! In fact, their AUM as of July end was 5080 cr. It was twice as much about 6 years ago, in 2013!. Doubtless much of these old positions during the heydays of 2011-2012 when prices of gold were rocking. People have had to wait for several years now for seeing prices near those levels. At the current levels we have returned to the price levels that used to prevail back in 2013 or so. Hence it is not such a surprise to see that old holders are bailing out of positions now that they are being offered a chance to move out with minimal losses! Interestingly, there has been an outflow from gold ETFs for every year since 2015 I.e. from the time prices started to rise!
What does this mean for Gold prices ahead? From a sentiment perspective, the anxiety to book out of pending positions is still a fear trade and such supplies will soon run out. Obviously, the new buyers are doing so on current considerations while sellers are operating from their old perspectives! This supports the analysis shown yesterday that the prices of gold are unlikely to fall much and lower levels would continue to be a good buying opportunity. Moving ahead from the near term, what does this mean for the long term? Lets check out the long term chart of Gold.
The big bull market in Gold ran from 2001 (around $250) to $1572 by July 2011. Since then the prices have been under correction and have declined in the form of a three leg pattern until July 2018, for a 7 year corrective phase. In price, it dropped to a low at 1045 in Oct 2015 and after a brief rally, dropped again to a higher bottom at 1167. On the quarterly chart one can see that this was a 50% retracement in price and a 62% retracement in time. One can therefore state that there is a price and time match within the corrective pattern.
Using two popular and reliable oscillators RSI and DMI, we find that an extraordinary amount of momentum got built up during the bull run and now the past seven years has seen that getting pared down to the neutral levels. Importantly, the corrective phase has not eroded the momentum strength built in the bullish years. Rsi has come down to 40 levels while the DMI lines (all three of them) have converged towards the 20 levels. Both these suggest that trends had returned to neutral towards the end of the corrective phase.
Prices have been up for the last 3 quarters and although the pace has been languid though steady, the improvements in momentum are notable. The RSI has managed to penetrate above 60 levels in the current rise while the +DI once again seeks to become dominant. These are early indications of revived bullish intent. If one moves down the time scale of charts to monthly and weekly, we find similar pictures of strength, only even more so. Undoubtedly, therefore, gold charts are indicating that the bullish case is just formed and there is much to go before any turns may occur. It seems quite probable that Gold is on its way to challenge the previous swing highs near 1760 in the coming months.
This is important from equity angle also. Ultimately, the amount of money chasing assets is limited and money goes where returns are highest. Gold has given a return of 29% in the last one year compared to a negative 3% for Nifty!! With gold prices now making it as headlines, people’s attention will be drawn to the metal and soon we may see retail money will start moving towards Gold ETFs and that will be so much less available for equities. This is of course a long term impact and not something that traders have to really worry about! But for those who are interested in gold, the big return we have seen in the last one year could be just part of the story.
There was a time when gold was looked upon as only being a ‘Love Trade ‘ (seasonal) or ‘Fear Trade‘ at times of geopolitical turmoils. That paradigm may be changing as new dominoes in the form negative interest rates across many developed countries, trade wars, threat to Dollar hegamony etc are changing the way gold is being viewed.