Gold Freefall – The End is Near?

A technical review of charts.

Today we saw gold price action touch levels that have not been seen in a year.  If one were to look at gold prices now and 13 months ago, one could possibly think it has been a flat year for the metal. Instead, investors have been on a wild ride.

Last July, gold touched a technical support level near 1200 then rose sharply over the next two months to provide a 13% gain up to 1360, which didn’t last long.  It retraced as usual into December, then rebounded strongly again in January, both moves being seasonally typical.  April started a strong decline, which we are now in the 5^th month of down prices. In the past 20 years, there have only been 3 other time periods with gold down 4 months straight (including 2016 where there was 1 month nearly flat).

Looking at today’s price action, gold again touched 1200. Price has been declining with technical oscillators increasing, which is considered a bullish signal. Gold is also seasonally strong in August, which we have not seen yet, however the month is not over.

Looking to where the selling may have come from this year, the below chart may give us the answer. Russia and Turkey have highlighted the news as of late. The below chart from the World Gold Council should be updated soon for Q2, and it will be interesting to see the changes.

The World Gold Council page explains:

“This chart was updated in June 2018 and reports data available at that time. Data are taken from the International Monetary Fund’s International Financial Statistics (IFS), June 2018 edition, and other sources where applicable. IFS data are two months in arrears, so holdings are as of April 2018 for most countries, March 2018 or earlier for late reporters. Where the World Gold Council knows of movements that are not reported to the IMF or misprints, changes have been made.

The percentage share held in gold of total foreign reserves is calculated by the World Gold Council. The value of gold holdings is calculated using the end of quarter LBMA Gold Price, which is published daily by ICE Benchmark Administration for the value of other reserves are taken from IFS, table ‘Total Reserves minus Gold’.”

One last chart for the bullish gold case. Gold has a negative correlation to the US Dollar. The dollar has been extremely bullish this year. Looking back at its movement from late 2016, the Dollar is at its 50% Fibonacci retracement level and RSI is touching the overbought line. The last time it touched it touched (late 2016) it started a decline that lasted over one year.

There are definitely fundamental cases out there of why the Dollar should remain strong, but the charts indicate that it is currently at a difficult and possibly deciding level. With it trading inversely with gold, this could possibly be technically positive for gold.

Only time will tell if higher prices transpire, but once you add the latest Commitment of Traders report having the gold speculative short positions as the biggest in history (can you say short squeeze?) and all of the above having favorable aspects for gold to appreciate, I would not be surprised to see gold prices considerably higher in the near future.