Last week’s big sell-offs put gold firmly in oversold territory, and we’re seeing the expected bounce right now.

But there’s been tremendous technical damage done, and the question remains whether the metal can recover its lost ground with Fed policy in the crosshairs.

June 21, 2021

Dear Fellow Investor,

Well, last week’s experience was a shot to the gut for all gold bugs everywhere, and to the entire idea of a new gold rally.

It’s only been a few days since I was talking about how gold might take a few tries to get through $1,900, even though it had run right through the $1,800 and $1,850 “big number” levels without the usual hesitancy.

While I did warn that such a move wasn’t the historic norm and thus there was a risk we would revisit those lower levels, I admit to being suckered in by gold’s remarkable rally off of the double bottom in March.

Much of that rally was erased last week as the Fed indicated it was starting to think about raising rates.

Granted, it wasn’t much of a change in their approach, with a shift of a few votes to a majority now predicting the first rate hikes by the end of 2023, as opposed to a minority at the last meeting. But it was important as the Fed’s first shot across the market’s bow, alerting it to the fact that they were now talking about raising rates.

And it was enough to send investors rushing to sell paper gold.

To add insult to injury, Fed governor James Bullard came out with comments on Friday reiterating the Fed’s new approach, sending the markets (including gold) tumbling again.

The bottom line is that from Wednesday’s open to the close on Friday, gold lost about $130…and just about any remaining bullish sentiment.

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Hope Amongst The Ashes

The result, however, is that gold reached its most oversold levels since early 2018, and a bounce-back seemed inevitable.

We’ve seen that today, with gold jumping about $20.

The yellow metal is outperforming silver, however, which is an indication that this is a reactionary bounce rather than the beginnings of a more-sustained rally.

On the positive side, as you can see in the chart below, that double bottom from March is still in effect.

Moreover, while we dropped below both the 50-day and 200-day moving averages, the 50-DMA is still approaching the 200-DMA. That retains the possibility of a “golden cross” if/when the 50-DMA crosses over, potentially bringing technically-based traders back into the market.

The bad news, of course, is the aforementioned technical damage done by this sell-off. It will take a considerable run from here, back through previous support levels (now resistance), to repair the charts.

And even in the near term, things could get very volatile. There’s an unusually large number of Fed speakers this week — 14 to be precise — highlighted by Fed Chairman Jerome Powell speaking before Congress tomorrow.

These will provide opportunities for Fed officials to walk the recent stance back a bit — but with the U.S. stock market rebounding strongly today, they may conversely feel they have some room to pile on again.

Pulling back from this immediate uncertainty, the long-term picture remains as bright as ever, as the Fed no longer has the luxury of getting ahead of inflation.

In fact, debt-service costs and the necessity of keeping the financial-asset house of cards intact mean that they must remain behind the curve.

It will take some time for most investors to come to terms with this new reality, however, and the days ahead will remain volatile until then. Our best bet for now is to wait for signs that this rebound has some legs to it.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference