Heading into 2019, I was rather bullish on oil and gold. I had been bullish on gold for several months as the precious metal was oversold in the third quarter of 2018 and the sentiment was the most pessimistic it had been since 2001.
As for oil, it dropped sharply in the fourth quarter of last year. It was oversold heading into 2019 and the sentiment toward crude was the least optimistic it had been since June 2017. Both oil and gold rallied in 2019 and the picture is much different from what we saw one year ago.
Looking at oil first, we see that it rallied sharply in the first four months of the year—jumping from around $45 a barrel up to $66.60 in April. Oil then retreated back down to the $50.50 area before bouncing again. Crude seems to have settled into a range between $50 and $62.50 and it is up close to the upper end of the range at this point.
There is a bit of a downward trend to the highs from April and September and if we connect those two highs we get a downward sloped trend line. Oil is right at that trend line currently and looks like it is trying to break above the trend line. The commodity did move above its 104-week moving average this week, but it also did that back in September when the attacks on Saudi oil operations took place.
We do see that the weekly overbought/oversold indicators are approaching overbought levels, but haven’t quite got there yet.
One big concern I have for the oil rally is the Commitment of Traders (COT) report. Large speculators are net long over 500K contracts at this time and they just moved across that threshold in the last few weeks. Back in April, the group was net long over 500K contracts before the price fell. Prior to that, the group had been net long over 500K contracts from November 2017 all the way through the peak in September ’18.
With the group being net long huge numbers of contracts throughout the rally in 2018, the concern about moving above the 500K mark isn’t as much of a concern as it could be. However, because oil is used in production, it is dependent on strong global economic conditions to fuel demand. If we see any signs of economic slowing in 2020, we could see the demand for oil slip a little.
Of course, there is always a risk of geopolitical tensions increasing in the Middle East and that has been the case for as long as I can remember. Any time we see tensions increase we tend to see the price of oil jump. This is an aspect of oil investing that always present.
Turning our attention to gold, we see that the precious metal also peaked in September and then retreated. The price fell from the $1,566 an ounce range down to the $1,450 range. Gold has rallied back above the $1,500 level in the past week and that moved it back above its 13-week moving average.
The overbought/oversold indicators look much different from what we saw with oil. The weekly stochastic readings were down in oversold territory in November and have recently turned higher. The 10-week RSI was hovering around the 50 mark, but it has moved back above the 60 level in the last few weeks. The momentum looks to have shifted in the last few weeks and we could see gold rally back up above the $1,550 mark in the next few weeks.
Sentiment toward gold has remained rather bullish even as the price retreated from September through November. The latest COT report for gold shows the group is net long 286K contracts and they have been net long at least 250K contracts since June. The 300K threshold is a level that hasn’t been breached too many times in the last few years, but it hasn’t marked tops in the price either.
Like oil, gold can be subjected to big swings based on geopolitical tensions as it is seen as a defensive play. Gold can also rise when global economic activity slows due to the defensive aspect.
Heading in to 2020, I would be in a holding pattern with oil as I think it needs to break the downward trend and see some of the bullish sentiment wash out before it breaks higher. I’m not sure the global economy is seeing enough growth for that to happen just yet. If oil does break above the trend line, I would look for the first pullback before jumping on board.
As for gold, I think the upward momentum it has right now will continue in the first quarter. We could see some resistance in the $1,550 area, but the all-time high in gold is all the way up above $1,900 an ounce. That high came back in 2011. I don’t think we get anywhere close to the all-time high in 2020, but I can see gold rallying 12% to 15% over the course of the year. If we see a pullback in equities, a 12% to 15% return from gold could be very appealing.