Hi YXI friends,

Since November, Gold has cooled from its relentless rally earlier in the year. While it has been attempting a bounce, the price action appears stuck in a consolidation pattern that is typical of a corrective phase.

What has driven this particular behaviour in the price of Gold? Where is Gold headed in the near and medium terms?

Today, we will dissect Gold’s price action through the lenses of Global Liquidity, Seasonality, ETF flows, Central Bank buying, and Technical Analysis.

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Gold’s Bull Run Has Been Halted By Falling Global Liquidity

There is not a “formal” definition of Global Liquidity. Here we use the M2 money supply of the world’s five largest economies to approximate Global Liquidity: the US, China, Eurozone, UK, and Japan. The measure is denominated in US Dollars on the right hand scale of the chart below.

Global Liquidity has “contracted” since the end of September due to a surge in the US Dollar strength. As Gold is normally quoted in USD per ounce, a stronger USD is a headwind to the price of Gold.

When we compare Gold prices (using GLD, the Gold ETF as a close proxy) with movements in Global Liquidity, we observe a 3-4 week lag between the two. This means the Gold price tend to move in the same direction 3-4 weeks after the Global Liquidity expands or retreats.

The sharp fall in the Gold price in November corresponded to the Global Liquidity shrinking in October. The subsequent rebound in mid-late November also coincided with a temporary stabilisation in Global Liquidity in the final week of October.

The risk here is that as Global Liquidity has continued to drift lower since late October, a significant headwind to the price of Gold.

2. Seasonality Is A Positive Factor

However, there is a bullish catalyst for Gold in its December seasonal performance.

Since 2005 (GLD was created in November 2004), December by far is the most bullish month for GLD, with an average performance of 3.4%, followed by March and July.

December also enjoys the highest win rate for Gold, as the Gold price closed higher at the month-end 68% of the time. That is as good as it gets.

The chart above shows all of the December performances for GLD since 2005, with just 6 losing years, the worst being -6.4% in 2010.

However, it should be noted that the December record since COVD has been much weaker than the 2010s, seeing 3 out of 4 monthly sessions closing at a loss.

3. ETFs were muted in November

The fall in Gold price in November coincided with net ETF outflows in November, led by European ETFs.

Compared with the buying frenzy in October, Asian ETFs were also muted in November.

North America saw ETF flows mid month, but it was not sustained into the beginning of December.

4. China’s Central Bank Has Resumed Buying

China’s central bank, People’s Bank of China (PBoC), paused buying Gold in May-October, maintaining the level of 72.8 million fine troy ounces (2,264 tonnes).

However, PBoC’s November balance sheet showed a purchase of 160,000 ounces of Gold, or 5 tonnes. It is a significant signal that PBoC is ready to restart its Gold accumulation.

It may help explain the dip-reversal in mid-November, apart from the Global Liquidity factor mentioned earlier. And it would not have been the first time China bought the dip and help reverse the Gold price.

Was China’s Gold purchase opportunistic?

The most likely explanation is that after Trump won the US Election, China sees greater odds of geopolitical conflicts and the continuing need to decouple from the US Dollar hegemony.

Currently, China holds 2,269 tonnes of Gold, worth $195 billion USD, a significantly smaller amount than its $3.26 trillion in Foreign Currency reserves. This means the trend of purchasing Gold will likely continue in the medium term to better rebalance its reserve portfolio.

5. Technical Analysis Is Neutral Short Term, Bullish Medium Term

GLD Weekly (https://www.tradingview.com/x/pmul6bmL/)

There is no doubt that the majority of the easiest gain in this bull run (from October 2023) is behind us. However, the bullish cycle looks incomplete and there is likely further upside in the medium term.

For those new to Elliott Wave, it simply means that judging by the extent that price has travelled from the October 2024 low relative to the initial October 2023-April 2024 run, the market likely has more upside momentum to offer.

GLD appears to be in a corrective wave (4) phase of wave circle-5 (more below). I see the wave (5) of circle-5 target in the $270-$300 region.

GLD Daily (https://www.tradingview.com/x/yBP0GJGE/)

In the near term, we are likely in wave C of (4), which can end between $224 and $229 if wave B has already topped. This expectation is mapped out in black on the price chart above.

However, there is a chance that we bounce higher in December to finish with a higher B wave than currently marked, which will bring up the finish line of wave C too. This is not my primary expectation, but an alternative path that is also possible.

Personally, I don’t like trading B-waves (the temporary bounce before the final leg down), even if they look tempting in the short-term. It is difficult to put a target on wave Bs, and therefore the risk-reward does not justify the trade.

6. Putting It Together

What do we make of all the confusing signals from Global Liquidity, Seasonality, ETF flows, China buying, and Price Technicals?

This is what makes markets nonlinear. It is dangerous to form unshaken conviction using just one tool, which likely works only some of the time. It is also important to acknowledge that we will never have complete information, and therefore should always put a stop loss to protect our capital.

To me, while the December seasonality and China buying factors appear very tempting in the short term, I remain cautiously on the sideline. I am a happy observer until the price either bottoms out around mid $220s or invalidate my concerns by claiming a new all-time-high. In the latter case, we can reassess the chart and buy in the subsequent pullback.

In the medium term, I do think the final leg of a blow-off top could form as a Gold price recovery becomes enticing enough for ETF flows and global retail to chase together.

Tools I find helpful:

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— Yimin