Gold $US1000! Now What? What Now?
Let’s take a step back and examine Gold s prospects. We will examine:
In our previous newsletter we said that Gold would reach $1000 then pull back and trade in the rising channel which has been in place since last November. Well Gold did exactly that, pulling back with from the $US1000 level with a vengeance. It paused around the $890 level and is now finding resistance around $US950.
- Underlying Trend
- US Dollar (USD)
- US Dollar (USD)
- US Dollar (USD)
Gold has been the best performing asset in this bear market which has been in place since 2007. Gold is still trending up in the medium term (see image below).
Figure1: 4 Year Gold Chart
Gold typically experiences price weakness from March through to July-August. This seasonality happened last year with a significant extended six month pullback of 25% which did not bottom until September-October.
Figure2: 2 Year Gold Chart
US Dollar (USD)
The US Dollar’s position as the world reserve currency continues to hold. In the bigger picture (see Figure 3) you can see the USD strength is reasserting itself since bottoming last August. Further strength in the USD will weigh on the Gold price in the near term.
Figure 3: US Dollar Decade Chart
Volatility Index (VIX)
Volatility spiked last October and again in November at which time the Gold market commenced its recent bull run. You can see from Figure 4 that volatility has now backed off but is still at historical highs. If volatility continues to subside the price of gold will remain under pressure.
Figure 4: Volatility Index
Third Time is a Charm
Typically markets take at least three attempts to break key support and resistance levels.
Gold has tested the $US1000 level twice in the past two years forming a double top (see Figure 2).
The Gold bulls need to build momentum again in order to make another assault on that key resistance. Gold may be now in the process of forming a head and shoulders pattern (see Figure 5).
If Gold closes at a price below the recent support, that would violate the rising channel which has been in place since October last year. Our target prices would be the 200 day moving average around $US860, then $US800 if there is further weakness.
Figure5: 1 Year Gold Chart
The easy money has been made by the bulls in gold with the run up to $US1000. Gold is due for a pull back having recently formed a double top (see Figure 2). If the Gold price breaks down from the key support around $US890 then our target prices will be the 200 day moving average around $US860, then $US800 if there is further weakness.
Seasonality is pointing to weakness of the gold price into July-August, which would be helped by the continued strength in the US dollar in the near term. If volatility continues to abate that will further hold the Gold price back. The gold bulls will need to build up momentum again in order to make an assault on the $US1000 then $US1200 which is the medium term bullish target for Gold.
Any portfolio Gold or Gold stock holdings should be reduced or at least protected using either CFDs or option strategies. Refer to MDS Financial Research for further updates.
Remember the underlying trend for Gold is up. Gold is still set to outperform paper monies in the medium term, as the Gold price has broken out to new highs against many of the other major currencies including: Euro, Aussie Dollar and the Canadian Dollar.
by Michael Hevern