Gold looks poised for a new all-time-high … this could be a historical surge … how our mean reversion rallies are doing … Luke Lango’s AI Trader subscribers lock in a big win
Gold is on the verge of pushing through a multi-year resistance level to set a new all-time high.
Get ready – if the breakout happens on strong volume, this is a trade you want to be in.
Stepping back, we all know the stock market is on fire. The combination of cooler inflation and Goldilocks economic data has Wall Street embracing a “soft landing” outcome as it eyes rate cuts in 2024.
The latest data supporting this arrived earlier today. The core personal consumption expenditures price index (that excludes food and energy) rose 0.2% for the month and 3.5% on the year. This was in line with estimates.
This growing soft-landing hope has juiced stocks all month. Since October 30th, the S&P has erupted more than 10%. It’s now barely 5% below its all-time high.
But what might not be on your radar is gold, which has surged 13% since October 6th. This is nearly double the performance of the S&P over the same period.
Chart showing gold nearly doubling the S&P since early October
Source: StockCharts.com
***We’re in an economic climate in which gold outperforms for a handful of reasons
One, there’s the expectation of rate cuts as we just noted.
Gold tends to underperform when rates are higher because investors prefer income-paying assets, and gold pays no dividend. But when rates fall, that opportunity cost decreases, and gold’s appeal increases.
Two, there’s significant geopolitical risk with two regional wars that could spread.
Historically, when investors are worried, or uncertain about the future, gold is the go-to asset for wealth preservation.
Three, our government’s financial position continues to deteriorate.
As we’ve chronicled here in the Digest , our government’s spending/debt problem is unsustainable – and the purchasing power of our dollars is collateral damage. Protecting your wealth requires moving into assets outside of the dollar. Historically, gold is one such “wealth preserver” asset.
Four, the U.S. dollar is pulling back.
After hitting a recent local top of nearly 107, the U.S. Dollar Index has fallen sharply, now coming in at 103.
Chart showing the US Dollar Index pulling back to 103
Source: StockCharts.com
When the dollar is weaker, it requires more of those weak dollars to buy the same volume of gold. This pushes up the dollar-denominated price of gold.
Now, before we get to our prospective gold trade, let’s establish some context by looking at the type of trade we’ve recommended most recently in the Digest.
***The power of hitching your wealth to a mean-reversion stock
Regular Digest readers are familiar with “mean reversion” trades. In short, this is when a quality asset suffers a market selloff that goes too far, too fast.
When we see “oversold” conditions show up in our technical charts such as the Relative Strength Index and the MACD, we step up to the plate and take a swing (assuming other favorable conditions are in place too).
To illustrate, in our October 9th Digest, we profiled a handful of stocks that appeared oversold and potentially ripe for a trade based on our analysis of their Relative Strength Index and MACD charts.
To be fair, our takeaway wasn’t that each one of those stocks was a “buy” on that exact day. But they were close enough to be on our radar, in the discussion. So, for convenience, let’s just look at what these stocks have done since that Digest.
For context, since October 9th, the S&P has climbed 5.7% (as I write Thursday morning). And here’s the performance of our highlighted stocks from smallest to greatest return:
With a mean-reversion trade, we’re trying to catch the beginning of a directional inflection point. We’re betting that kneejerk bearishness has been exhausted, so we’re buying a stock in expectation of cooler heads bidding up the price quickly.
In essence, we’re trying to capitalize on new, bullish momentum – and as you can see above, it can be very profitable.
But what if we forgot about the “new” part, and instead, looked for “proven” bullish momentum that’s in mid-move?
In other words, what if we just hopped aboard a rocket-ship that was already pushing into the stratosphere?
***The power of buying at an all-time-high breakout
I used to be nervous about buying a stock when it was setting a new all-time high (or a 52-week high). My fear was: “We’re in thin air up here. It feels like heightened risk for a big pullback.”
If you’ve felt that way too, a study of market history tells us such a fear isn’t warranted.
William O’Neil, who founded Investor’s Business Daily and created the very popular swing-trading system known as CANSLIM, had a quote about this:
It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower.
My friend Meb Faber, the CEO of Cambria Investments, is a widely respected quant analyst. Here’s his take:
Is buying stocks at an all-time high a good idea?
No, it’s not a good idea, which should surprise no one.
The fact that it is a GREAT idea, well, that should surprise everyone.
Meb detailed the results of a back-test he ran that had two rules: remain in stocks if they’re trading at all-time highs at the end of the month. If they’re not at all-time highs, then move into to government bonds.
Here’s the conclusion:
It turns out, it’s a pretty damn good strategy. Better returns than just stocks, lower volatility, and WAY lower drawdowns… It’s an acknowledgement that all-time highs are nothing to be afraid of.
And this brings us full circle to gold.
As we pointed out at the top of this Digest, gold is poised to set a new all-time-high. But if it breaks out to a new high, the ensuing gains could come fast and furious thanks to a triple top of resistance.
***This gold breakout could be one for the record books
As I write Thursday, gold trades at $2,054. This is just a few dollars beneath its all-time-high of $2,074 set in August of 2020.
But gold has hit its head on this all-time-high level twice before, creating a triple top (if it fails here again, it would be a quadruple top).
Chart showing gold unable to break resistance at $2060 for the last three years
Source: StockCharts.com
But such repeated failures generate tremendous pressure.
The stronger the resistance, the greater the strength required to break that resistance, the more explosive the gains often are on the other side of that resistance.
Case in point, look at gold and its multi-year resistance level of roughly $1,360.
In 2016, gold hit the general $1,360 level, then pulled back. For three years it tried – and failed – to push through this level. While disappointing to gold investors, it created enormous pressure.
When the yellow metal finally broke $1,360 in 2019, that pressure pushed it more than 50% higher as it soared to its current all-time-high.
Below is how this looks. Note how many times gold tried and failed to break $1,360. And then look at the vertical ascent afterward.
Chart showing gold surging in 2019 after three years of consolidation, unable to break out to a new high
Source: StockCharts.com
It appears we’re repeating this pattern today.
After three years of consolidation and head-bumping on $2,074, gold is stepping up to the plate yet again.
Now, there’s no guarantee it’ll break out, but given the economic climate we referenced earlier, there’s a strong likelihood.
Keep your eye on this, and then – importantly – watch the volume.
Volume is to a breakout trade what wind is to a sailboat. You can point your rudder in the right direction, but without sufficient wind, you’re not going to go anywhere.
If gold breaks out to a new high, to put the odds in our favor that it’s a trade we want, check the volume. We’d like to see very heavy volume, preferably at least 1.5X – 2X the normal volume. This would be evidence that traders across the board are buying into the move, not just a handful.
If you want to make this trade, the easiest way is with GLD, the SPDR Gold Shares Fund. You can also add more potential return (and risk) to your trade by looking at gold miners. Check out the holdings in the VanEck Gold Miners ETF GDX for ideas.
***Before we sign off, while we’re talking about trades, a quick word of congratulations to Luke Lango’s AI Trader subscribers
Yesterday, one of AI Trader’s stocks, Rover (ROVR), surged 30% after news broke that Blackstone is acquiring it.
Subscribers will close out their position for roughly 70% profits in less than two months.
Chart showing Rover exploding 70% while in Luke Lango's trading portfolio
Source: StockCharts.com
But it’s not just Rover that’s been climbing in the AI Trader portfolio.
Their BellRing Brands trade is up 27% since early-October…
Their Intel position has jumped 39% since the end of last month…
And their Heritage Insurance Holdings has exploded 78% since mid-October.
As we’ve been saying for months in the Digest, let’s trade this market higher as long as we can. Luke and his AI Trader subscribers are doing exactly. So, a big congratulations.
Returning to gold, watch for the breakout to a new all-time-high, confirm it’s a high-conviction move by monitoring the volume, and if so, get in and hang on for what we hope will be a historic move higher.
