There is so much speculation into gold’s next move. The metal has been in a two-month trading range on relatively low volume since the March sell off and rebound around the options and futures expiration week, when gold saw physical delivery issues. Back in March, Kitco News wrote a nice summary explaining how the strong physical demand outmatched the dwindling supply. They reported “According to reports, bullion banks across the board reported massive liquidity issues Tuesday in the physical market.” There were also issues with size of the gold bars being delivered, and these issues created great havoc between monthly prices resulting in incredible spread prices. Within two weeks, gold traded from $1,700 to $1,450 and back to $1,700. A $250 price move during an options expiration week was incredible to see and challenging to trade.
Since then, issues have been sorted out and gold has consolidated into a roughly $100 trading range.
This trading range on the weekly chart resembles a pennant or flag pattern. This is a bullish pattern in technical analysis. According to pennant and flag calculations, this bullish continuation pattern leads us to a price target of about $2,000 if gold breaks through the trading current range, namely the $1,750 level. Once/if it breaks out, the expected move will take approximately two months we expect if the breakout happens soon. If the breakout takes longer to materialize, we expect the move to $2,000 be more measured, and take longer as well. Looking at the big picture, that would be quite a substantial move of over 15% from where it is currently trading. However, the environment this year is ripe with surprises.
The pennant and consolidation are forming with relatively low volume. This is not unusual; however, the volume is the lowest it’s been in the past three years. The price move from late 2018 when gold was trading under $1,200 has been significant, mainly on rising volume. Sometimes low volume at a top is considered bearish, on the thought process that there are not enough buyers to push prices higher as it tests tops. However, one more factor can be viewed for the bullish break out case.
That additional item we looked at is a seasonal factor in gold that suggests this consolidation is a bullish resting place. When viewing the 20-year seasonal chart, June is seen as a weak month, followed by strong summer months.
Technically, looking at the charts, along with other technical and fundamental factors, a bullish bias for gold over the next few months can be created, even though prices have been stagnant. Only time will tell. The key levels we are watching are breaks above the high $1,700’s or below $1,675. A move beyond these key levels would provide further trading guidance.
Rui Matos, CFA, CFP, FRM contributed to this article. Disclosure: Author holds both long and short gold positions.