In retrospect, we should have known gold prices were destined for a sizeable pullback as of late February. A key line in the sand was in place, and besides, the underpinnings for weakness from gold futures and instruments like the SPDR Gold Trust ETF (NYSEARCA:GLD) have been crystal clear for months. That is, interest rates are on the rise, and the Federal Reserve is sooner or later (and sooner than later) going to back that move up by upping the Fed Funds Rate.
There is some good news on this front though … maybe. A major technical floor awaits the bears. Let’s just hope the U.S. dollar plays along and at least gives the precious metal a chance to recover.
Right on Cue for GLD
Some were calling it the rekindling of a much bigger rebound, when gold and related gold stocks like the Direxion Daily Gold Miners Bull 3X ETF (NYSEARCA:NUGT) reversed a selloff in late December. All told, GLD rallied 12% from then through late February, reigniting hopes for a major run-up in gold prices.
It wasn’t meant to be, though. Gold bumped into a rarely watched Fibonacci line at $1264, and that’s all it took to roll the rally over. Gold has since given up more than 4% of that peak price.
Fibonacci retracement lines are the market’s — and nature’s, and mathematics’ — inherent repeated patterns. For stocks, it means there’s a natural tendency to backtrack 38.2% and 61.8% of a move.
In this case, the move is the span between the late-2015 low of $1,066 and the mid-2016 high of $1,387. The 38.2% retracement level from that high is $1,264, where gold prices topped a couple of weeks ago. Granted, it had already fallen back below that mark months ago, but once a Fibonacci line is established it’s always capable of coming back into play.
And in this case, it did.