Gold is up by $57 for the month of May to close at $1,731 in the spot market as of Friday afternoon. The metal is higher by $155 for the quarter thus far and $228 for the year 2020, which is not yet half over.
That said, in the markets as in life, nothing moves in a straight line forever. We have reason to believe that following some further gains during the month of June, gold is due for a multi-hundred dollar pullback that could coincide with the next wave of Coronavirus-related debt defaults.
Let us study both the long-term and short-term price action for gold to arrive at the highest-probability trajectory for the remainder of 2020.
Gold Long-Term Perspective
Investors and traders should always keep the big picture perspective in mind for an asset at all times. For the following analysis we will refer to the gold 2001 – present chart below:
To rewind: gold bottomed in the year 2001 at $255 per ounce.
The precious metal then began an upward rising trend lasting through early-2006, defined by both buyers and sellers emerging at higher and higher intervals (magenta lines).
In early-2006, gold broke higher through its upper boundary as buyers overwhelmed sellers (red callout). Notice how following the breakout, the former resistance trend acted as support on no less than six occasions, including the 2008 crash low at $680, the 2015 bottom at $1,045, and the 2018 bottom at $1,185. Support-turned-resistance is a common theme in technical analysis, as second-chance buyers emerge when an asset falls back to a key breakout level.
Following gold’s all-time peak in 2011 at $1,923 per ounce, the precious metal retraced nearly 50% to bottom at $1,045 in December 2015. In sum, gold spent nearly 6 years basing (2013 – 2019) below the key $1,434 level (black lines), before finally breaking out in June 2019 (red callout).
Gold Approaches Long-Term Resistance
Gold is now approaching two separate long-term resistance levels.
- (Upper blue lines) – Since the 2018 low at $1,185 per ounce, gold has witnessed a rising trend of sellers emerge every several months, labeled Primary Rising Resistance. Note how each time gold approaches this zone, it is rejected by sellers. Gold is approaching the blue resistance zone once again as this article is going to press. As the trend is rising, the sellers are expected to emerge at $1,800 by July.
- (Horizontal black lines) – Gold is also approaching significant horizontal resistance dating back to 2011 – 2012. Note how in the years surrounding gold’s all-time peak, the precious metal was rejected on three separate occasions each time it approached the $1,800 zone. We strongly expect that former buyers from this $1,800 resistance zone will be using the current rally to sell near break-even as gold once again approaches this level.
In sum, there are two important long-term resistance levels converging in the $1,800 region.
Gold Approaches Long-Term Target
A third target also corresponds with the $1,800 resistance region for gold.
In July of 2019, when gold broke higher through its 6-year base at $1,434 (red callout), we calculated a long-term target of $1,823 per ounce. This target was defined as equal to the amplitude of the 2013 – 2019 consolidation ($389), added onto the breakout point ($1,434). This target is independently-derived from the two resistance zones discussed above, yet correlates strongly in the same price region.
Gold Approaches Short-Term Target
A fourth short-term target also corresponds with the $1,800 region for gold.
Following the March 2020 Coronavirus panic and recovery, gold entered a pennant triangle consolidation during April and May (blue):
On May 14, gold broke higher through the upper boundary of the triangle at $1,721 (red callout).
This pennant triangle consolidation has an amplitude of $88 per ounce (black). The target for gold over the short-term thus becomes $1,791 per ounce in the spot market, calculated as equal to $88 added onto the apex of the triangle at $1,703. This target should be reached within the next 1-2 months. The target would be invalidated only by a failure to hold the lower boundary of the triangle on a daily close, presently at $1,699.
Takeaway on Gold
Gold is in a strong long-term bullish trend due to record low interest rates, Coronavirus fears, and geopolitical tensions, exacerbated as riots are breaking out in the United States.
However, four separately-derived resistance levels and targets all converge in the $1,791 – $1,823 zone. We expect that as gold approaches this zone, a confluence of sellers will be looking to take profits and/or exit their positions at break-even. A further wave of debt liquidation in global equity markets could be the fundamental trigger. As we saw during March, gold can be pulled lower as traders panic-sell equities and/or diverse commodities.
Gold should be due for a multi-hundred dollar pullback into the third and fourth quarters of this year. In a future article, we will evaluate support zones for high-probability entry points following the pending pullback.
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This article was originally posted on FX Empire
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