Does that necessarily mean we could see more gains?
I was asked if I thought the rally in gold was over. While no one can confidently answer that question, one thing I am still confident about is that the fundamental backdrop is still positive for the precious metal.
As we have seen with the US equity markets and London house prices, any asset price can get very expensive before the bubble bursts. I actually don’t think you can say gold has formed a bubble, or even if it has, I don’t think the bubble is large enough for it pop and deflate sharply. Perhaps it can deflate a little but when you compare it with the likes of the S&P and Nasdaq et al., gold can certainly get very expensive before topping out.
Central bank heads at the Jackson Hole Symposium are likely to reaffirm their commitment for running QE at full throttle for a while yet. If so, this should keep gold supported for at least three reasons:
- First, bond yields will most likely remain depressed, keeping the appeal of noninterest-bearing assets like gold and silver intact.
- Second, central banks' actions have already stoked fears they may be overcooking inflation. If investors become very concerned about inflation then this should keep gold bulls happy, since the metal is widely seen as an inflation hedge, among its other uses.
- Finally, if the ongoing risk-on, dollar-down trade remains intact, then all else being equal, buck-denominated gold should benefit.
Technically, gold is in a consolidation phase right now, meaning it is not trending in any particular direction. At the time of writing, though, it was near the support range of its consolidation, as it tested the old all-time high around $1920 that was hit in 2011. Once strong resistance, this level has turned into support for the time being. Thus, for as long as gold holds its own above this area, the path of least resistance would remain to the upside. However, a decisive breakdown would be bearish in the short-term outlook, especially if the rising trend line around $1900 also gives way.
Source: TradingView.com and ThinkMarkets
But my base case is that the bulls may defend their ground and so what I am looking for is the potential emergence of some bullish pattern to indicate the up trend has resumed. For me, one such signal would come in the form of a daily close above key short-term resistance in the $1955 range. For confirmation, a clean break above the corrective short-term trend would be ideal.
I will add one additional point here: even if gold were to break $1900 support, this would not necessarily mark the end of the long-term bullish trend, as technically the long-term uptrend could remain intact even if gold were to mean revert back to its 200-day average which comes in all the way down at $1671ish. Obviously, this will have big implication in so far as short-term trading is concerned, but that’s not the point I am trying to make here.