There was a delay in publishing today’s important update on the gold market but it is finally here. We thank all KWN readers around the world for your patience.
By Michael Oliver, MSA (Momentum Structural Analysis)
December 29 (King World News) – Annual momentum broke out finally and credibly as of the October close (84.90). MSA wanted more than the crossing of the downtrend, which arguably occurred earlier, but we wanted a monthly momentum chart close over the -20 level. October did that…
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As a first working target for 2017 we expect to see BCOM reach 102-103 area before resistance perhaps halts the initial post-breakout surge, now underway. By no means are we arguing that “that’s it.” At around that level, especially early in the year we see enough temporary momentum barriers to assume resistance there and some reason to expect congestion, maybe pullback.
For BCOM that level is about 17% above the current traded price of the index. Obviously, like any asset category index (S&P500, e.g.) there are sectors within the category that will rampage as that occurs and others that will underperform the BCOM as that first resistance is approached.
Oil: We recently argued (December 18 report) that crude is likely to cease its leadership role seen this past year and move to the back of the commodity pack in 2017, in terms of leadership and performance. Likely will see it near $60 before its traction gets slippery, and that’s another 10% or so more upside. But for crude oil this first major recovery surge is well past best points of entry and MSA suggests that it’s simply late to be joining in. For the time being risk/reward is no longer advantageous.
Based on long-term momentum factors we think that the food commodities, which were flat to down in 2016, will move to the front in 2017. After examination of both the meats (cattle and hogs) and the grains (soybeans, corn and wheat) we conclude that while meats could easily surge 20% as a first “out of the hole” rally, the grains look more likely to produce twice that percent gain before encountering first major resistance. Therefore, among commodities for 2017 we are focused on the grains as a likely outstanding sector.
JJG is a liquid ETN that covers the grain futures (iPath Bloomberg Grains ETN). There are also three Tecrium grain-specific ETFs that offer decent volume (SOYB, CORN AND WEAT).
DBA (Powershares DB Agricultural ETF) is a very liquid ETF that covers all of the agricultural futures (meats, grains, and softs).
If you want wider balance (but likely less upside performance) then there is DBC (Powershares DB Commodity Index ETF) which reflects the broad action of the Bloomberg Commodity Index. All of these ETFs are unleveraged.
In MSA’s December 3rd report, the focus was specifically on wheat, corn and soybean breakout levels for Q1 of 2017. Since that report the price level of those markets has moved upward, closer to the pending breakout levels. Before we issue a blanket category (grain) buy signal we will update our assessment of each grain and provide adjusted buy signal numbers, if needed, for each grain. We are looking for at least two of the three to break out before assuming the grain sector is emerging.
We realize that many investors’ prime focus is on gold, as it should be. Gold and gold miners (using GDX) powered through their long-term momentum breakout levels in early February and surged massively until mid-summer. Since then gold has retraced back to our original momentum-based breakout levels and actually traded a percent or so below (MSA buy level in February was a band between $1140-$1160). For GDX our buy zone triggered in early February was 15.50-16. It’s retracement dropped price back to below 19 (now back over 20 at time of this report). Therefore, as expected, not only did the miners outperform the metal this time around but did not retrace to their original buy signal points, currently GDX trading 28.5% above that original momentum-based breakout zone, despite that large pullback.
Gold annual momentum trend
The pullback since July was sharp, no doubt, but from the vantage point of annual momentum it was a drop back to support. Specifically it was a drop back to the horizontal momentum (top-end of massive several year wide base) that defined the upside momentum breakout in February.
MSA suggested that a trade to $1119.60 would be a number that would cause us concern (applicable only during 2016) at which point MSA would go to neutral. But so far the low trade by active front month future was in the low $1120s. What is of greatest importance is that so far the drop has not penetrated credibly below the top end of the momentum base.
The new 3-yr. avg. is projected to drop from $1244 this year to around $1190 for 2017. Any ability to hook back to the upside and close a month back over that average, just based on this annual indicator, probably is a statement that the secondary low is in place.
If the nearby contract is trading at current price when it opens 2017 (at $1148 at time of this report), then momentum will jump to the spot noted by the black arrow on the momentum chart.
A more intermediate term view of gold here.
Note that the prior six weeks were neatly clustered just below the momentum smoothing line (which is simply a moving avg. of the momentum readings themselves). Popped above it this week and appears to be emerging upside.
If this week can close out at current level ($1148) it is out above the smoothing line and highs of the past several weeks. Door opens at that point for a run to resistance and that level is clear – at or around the zero line/10-wk. avg. It was at that level (a few ticks above) that the two rally high weekly closes found resistance in September and in early November (circled, with red line). That average next week is just above $1200 and the following week just below $1190. Reaching up to that zero line area again in the next several weeks should be watched carefully for any ability to close out a week above that structure. But if can clear the recent clump of readings of the past handful of weeks, as is doing intraweek this week, should enable a run to that next resistance around the 10-wk. avg. (similar to 50-day avg.).
Long-term term number for 2017, if see gold reach 10% over the 3-yr. avg. again (last year’s oscillator high) then assume that a new leg of upside is fully in gear. In price that occurs in 2017 at $1309 (estimated). By the way, last year’s price high was $1377, so reaching last year’s top annual momentum tick at 10% over the 3-yr. avg. (that chart on prior page) does not require reaching the 2016 price high. Therefore, if you weathered the sharp decline and want a number that confidently argues the next bull leg is underway (and likely to be powerful), then MSA argues that it’s $1309. And again MSA stresses that gold miners are likely to outperform gold again in 2017.
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