Is the breakout in gold for real? Here's what the charts say

Published Tue, Mar 12 202412:34 PM EDT

Gold is glittering in the eyes of investors as a three-and-a-half year range seems to have finally been broken. Is this the break that so many gold bugs have been waiting for and if so, what are the broader market takeaways? If you surveyed a large group of investors and asked them if a gold breakout is bullish or bearish for the stock market my bet is a majority would say it's bearish. After all, gold is known as the flight-to-safety inflation hedge where investors seek protection in times of equity market uncertainty. And in some cases they would be right, but not in today's market. @GC.1 5Y mountain Gold futures, 5 years Looking at this weekly overlay of the U.S. Dollar ETF 'UUP ', S & P 500 ETF ' SPY' , and the gold market ETF ' GLD ' since 2018 you will see two clear relationships. The SPY and GLD charts are trading mostly in the same direction. The US dollar ETF UUP is trading with an inverse relationship to SPY and GLD. Wait, what? Stocks and gold are trading together? Yes, it's kind of like cats and dogs living together. Though it is a macro relationship anomaly, that's the way markets are trading right now. The driver of the current intermarket relationship includes the fourth macro asset class fixed income, not shown in this chart. U.S. bond yields react to economic data and the Federal Reserve's interpretation of that data to determine the outlook for federal funds target rate. As economic data comes in stronger than expected or with evidence of sustained inflation, interest rates move higher as markets expect Fed rate cuts to be pushed further back. When our interest rates move higher, our dollar becomes more attractive to overseas investors and moves up as a result. Being that gold is priced in U.S. dollars and is very sensitive to moves in interest rates, gold is trading INVERSE to the U.S. dollar. As a corollary, U.S. equities are also very sensitive to moves in interest rates and due to our large caps having vast international exposure they also usually trade with an inverse relationship to the US dollar. So those macro relationships summed up; Stocks and gold are trading together Stocks and gold are trading inverse to the direction of interest rates and the U.S. dollar. So, if you want to continue to be bullish on equities you want U.S. bond yields and the U.S. dollar to move lower, which should push gold and the stock market higher. Gold is not an inflationary safe-haven vehicle here, it's a confirming indicator for the stock market uptrend. Breaking down the gold chart Turning to the technicals of the gold market, I have some concerning analysis for stock market bulls, myself included. The gold futures chart is tracing an terminal Elliott Wave reversal pattern known as an 'ending diagonal'. This occurs when a trending move is lacking sufficient velocity creating overlap of the corrections within the pattern. The Elliott model suggests there are usually 5-swings and it looks like we may be tracing our 5th and final swing. If the gold market does not break out above the highlighted $2356 level we may be setting up for a failure. If this happens, watch what happens to the U.S. dollar and U.S. bond yields. Do they trade higher? If so, watch the reaction in the stock market - does it move lower with the failed breakout in gold? DISCLOSURES: Gordon owns Bitcoin and GBTC personally and in his research business TradingAnalysis.com. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.