The good news is, gold prices have been on the rise over the course of the past couple of months. After hitting a low of $1,078 per ounce in late July, gold has since fought its way back to $1,152 — a 7% rebound.
The bad news is, gold prices have still yet to recover from July’s harsh selloff. The metal is still on pace to end Q3 down more than 2%, and though it’s ending the quarter on a bullish foot, there’s no convincing evidence that any more recovery is in the cards.
And yet, though still out of reach right now, two catalysts for a renewed bullish gold price trend are within sight.
Gold Prices Still in Volatile Downtrend
Forget the daily chart of gold. Except for day-traders and swing traders who are making plays on the SPDR Gold Trust (GLD), the daily gold price chart or chart of GLD tells us little about what’s apt to happen next.
Rather, the weekly chart of gold futures paints a much more meaningful picture of the commodity.
Take a look. Even after the 2012 implosion stabilized, gold continued to make a string of lower lows and lower highs. That didn’t change in the third quarter. In fact, it was during Q3 that gold futures finally broke under a key floor at $1140 per ounce, which some had pegged as the final low gold would sooner or later use as a pushoff point to kick-start a recovery.
As for the reasons the gold price trend has remained bearish, the answers are simple enough: a lack of inflation, and a strong U.S. dollar.
Because gold is priced in U.S. dollars, a strong greenback means gold becomes more expensive to own (crimping demand), while a weak dollar encourages speculators and institutions to buy more of the metal.
In other words, the two are in an inverse relationship — one rises at the other’s expense.
With that as the backdrop, the U.S. dollar’s recent strength is a key reason gold prices and GLD have been anything but bullish. The chart of both instruments below tells the tale. While the U.S. Dollar Index has halted its heroic progress seen last year and has simply waffled over the course of this year, it’s waffled at abnormally high levels that ultimately keep gold prices on the defensive.
As for inflation, the big gold price rally between 2008 and 2011 was largely predicated on the assumption that the Fed’s — and the world’s — highly dovish cheap-money policies would eventually drive inflation through the roof.
It never happened. Even taking the recent implosion of oil prices out of the equation, the annualized inflation rate now stands at a very palatable 1.8%.
Perhaps even worse, though it’s now dated information, the chart above tells us that, as of Q2’s measure, actual consumption (usage) of gold finally broke down after stumbling since 2011.
The biggest dips in the second quarter’s gold consumption came from investors, who are finally starting to give up on gold. That’s the last place gold bulls wanted to see a drop. Investors and speculators were the bulk of the reason gold prices soared between 2008 and 2011, so seeing them lose interest now is reason for alarm.
Gold Outlook
While the bigger-picture scenario continues to look grim for gold prices (and for GLD as well), there is one factor perhaps working modestly in favor of gold … we’ll eventually reach a point where things can’t get any worse.
Are we at that point yet? Maybe, though any gold bull should know that any imaginable bullish situation for gold is going to be modest, with any recovery being painstakingly low. There are also a couple of major technical hurdles ahead.
The first technical impasse a rally will meet is the falling resistance line (orange) currently at $1,236, but falling daily. This is the same line that has tagged — perfectly — the last three major highs, each of which was lower than the prior.
After that, there’s a key Fibonacci retracement line at $1,357.80 that not-coincidentally lines up with rather important highs made in late-2013 and early-2014. Reaching the $1,357.80 level would be a best-case scenario; $1236 is the more realistic ceiling.
There is some good news on that front, however: The U.S. Dollar Index is finally starting to show hints of fatigue.
Specifically, the index has already started to chip away at the lower side of a converging wedge pattern, and is within reach of a break below the pivotal 200-day moving average line. And, with interest rates due to rise in December, there’s a small bit of a headwind starting to blow against the greenback.
If the U.S. Dollar Index can start a breakdown (in earnest), that should provide at least some fuel for a near-term bullish gold price trend. How much? Well, it depends on the strength, speed, and distance of the greenback’s stumble. The dollar probably isn’t poised for a huge setback, though … so again, gold’s technical ceiling at $1236 is the most plausible of the two ceilings in view.
Conversely, should inflation stay tame and the U.S. dollar not fade, the $1076 mark remains the make-or-break level. Should gold prices slip under that floor, it’s apt to set off a wave of selling that sends the metal’s price well below that level.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
