The precious metal is shining again amid a still-positive fundamental backdrop, but it needs to break through a key technical resistance area now to trigger a potential rally...
After rebounding just over 2% last week, gold has started this week on the front foot so far. The precious metal hit a record high at $2075 in early August, following sharp gains from the March low. However, since August, it has been stuck inside a wide consolidation range. Clearly, some investors must have wondered whether the metal prices got too hot, causing them to take profit and halt the rally. Yet, the downside has been limited, suggesting others probably think it still remains undervalued and are happy to buy the dips. I am of the view that gold and indeed silver could further extend their gains – but then again, I have been a long-term bull and there is always the risk that my bullish bias could cloud my judgement and ignore any bearish signs.
However, when I think of reasons why gold should sell-off sharply, I can only come up with a few reasons, mainly a big rebound for the dollar and a slide for government bond prices (or rally in yields). Then I ask myself how likely those scenarios are? Well, for yields to rise sharply, the Fed and other major central banks will have to drop their dovish views and start tightening their belts. So, it all boils down to the economy. But right now, or in the foreseeable future, the global economy is not in a state that requires tighter monetary – and indeed fiscal – conditions.
In fact, the US government is currently in talks to introduce more fiscal stimulus to offset the damage of the resurgent COVID on the world’s largest economy. Similarly, governments in most other developed economies have either increased spending already or are about to do more to bail out their own economies. Meanwhile the recent strengthening of the Chinese yuan means one of the world’s largest gold consumer can now purchase the metal relatively cheaper than before.
Thus, against the above backdrop, I can’t see why gold and silver should sell-off.
Indeed, there are technical signs to suggest both metals may have carved out a bottom and are about to stage a new rally. Let’s concentrate on gold – have a look at its daily chart:
Source: ThinkMarkets and TradingView.com
As the chart shows, gold has refused to hold below the last significant low that was formed in August. The temporary stay below this level at $1863 means the metal may have carved out a false break reversal pattern (you can learn more about this and other key reversal patterns
HERE). For this view to become validated we now need a higher high above $1973, which is the most recent key high made inside the consolidation. Ahead of this level though there are a few other key hurdles that need to break, not least around $1920-1 area. This is where a short-term bearish trend line meets the old 2011 record high. A clean break above this area would be very bullish in my view. But while we are below it, the bulls will need to proceed with a bit of caution.
Meanwhile for the bears, a break below Monday’s low at $1887 would represent a favourable outcome. If seen, another re-test of the August low would then become likely, potentially ahead of further losses. However, to be clear, this is not my base case scenario.