Gold’s Dead. Here’s Why We’re Buying…

Gold was the Jekyll and Hyde trade of 2016.

You could have netted double-digit gains (or more) during the first six months of the year as precious metals and miners vaulted to two-year highs. A nasty stock market meltdown, the Fed flip-flopping on its rate hike promise and the surprise Brexit vote fueled gold’s fire, sending the metal higher by more than 25% by the end of the second quarter.

But gold’s trajectory changed dramatically during the second half of 2016. While the major averages chopped along, gold couldn’t catch a bid. The precious metals rally completely lost its mojo. Gold’s drop slaughtered traders who opted to ignore the bearish market action and count their winnings at the finish of Q2. By the end of the year, the Midas metal landed almost right back where it started.

On our official scorecard, gold posted 2016 gains of more than 8%. The S&P 500 and the Dow both topped gold’s performance—despite starting the year deep in the hole.

We promised we would watch the gold breakdown for signs of a bottom early last month. By our calculations, precious metals had a chance at carving out support and offering us a tradable bounce once the market absorbed the reality of the December rate hike.

Today, we’re seeing signs that this bounce is materializing. Your first shot at quick, double-digit gains in 2017 has arrived. And it could be a wild ride…

But before we get ahead of ourselves, here’s a quick disclaimer:

The precious metal plays we’re tracking right now have endured some serious pain over the past six months. I can’t promise you that the lows are in. What we’re looking at right now is a quick trade. Get in, get out, and get paid. That’s it!

Is the constructive action we’ve noticed in gold and other precious metals the beginning of another leg higher? Has gold blown off enough steam to give the early 2016 bull a new life?

Only time will tell. For now, we must think of precious metals as a quick trade. And nothing more…

Let’s get to the evidence.

You probably recall that gold’s do-or-die moment came into play as it tested its 200-day moving average in October. Gold finally crashed through its 200-day moving average the day after the presidential election. After losing its grip on its longer-term trend, the metal dropped below $1,200—a level that had held strong since gold’s initial breakout last winter.

That certainly wasn’t bullish. At the start of December, we told you the chances for a meaningful gold rally into the holidays went from slim to none. That’s exactly how it played out. Gold wandered lower, eventually cracking below $1,130 just before the Christmas break.

That’s when things got interesting…

After briefly visiting 11-month lows, gold has started to quietly bottom out. Its spot price has risen five out of the last six trading sessions. Now we have a situation where gold is firming and the furious dollar rally is losing steam…

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That’s a great recipe for a successful short-term trade. A little mean reversion can go a long way…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning