The spot gold price is once again knocking on a ceiling of resistance having made a recovery back into the $1220s. This latest move follows a retest of the all-important $1200 zone which bulls successfully defended last week. The zone was well protected with a number of supporting trend lines including a key diagonal support formed from previous resistance before the breakout to $1244. A trend channel on the Relative strength (RSI) Index indicator also boosted the odds of the zone holding.
Although gold is looking keen to bump higher – once again testing the top of a short-term trend – the fact remains that the overall price action is still firmly constrained in a bear flag that’s been forming since the August low of $1160. A close above $1225 could trigger another run to take on that obstacle with the top of the flag standing at $1250 – that is if the price can jump over the hurdle of horizontal resistance at $1235.
It’s likely that a failure to make progress north on this next attempt will not bode well for a continued bull case. The risk of breakdown grows with every failure and retest, and another test of channel support would need $1205 to hold. So far, each pullback has tested a 2017 trough with $1181 and $1196 being successfully defended to date. $1205 is also another one of those key 2017 troughs and is the next obvious level if support is to continue stepping upward. A break below could open the door to sub $1200 levels with a retest of the $1160 low. However, a breakdown of the bear flag suggests a lower base may be sought, with $1125 the next key line of support for gold.
A key indicator that the gold price was about to reverse a few months ago was the Commitment of Traders report. Historic data suggests as the differential between Commercials (banks) and Large Specs (hedge funds) narrows, the gold price tends to bottom. The differential is again narrowing indicating a potential bottoming, however as the chart above shows, this recovery in the spot price doesn’t match previous ‘V’ shape recoveries such as the bottoming out of the price in late 2016. Neither has it formed a bowl pattern akin to the recovery in late 2015. Instead, until proven otherwise, current price action resembles a bear flag threatening the possibility of further lows. Although intensive buying by central banks and increased market volatility almost certainly imply a higher gold price will prevail in the coming years, only time will tell whether the lows in August marked gold’s recovery.