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Has last month’s gold price bounce lost its shine? (GOLD, GLD)

There has been a lot of noise around the gold price this year as it has struggled to confirm its bounce last month is the start of a turnaround for the metal.  It is increasingly looking likely that gold bulls may be in for a prolonged wait, and deeper lows could be visited ahead of a reversal.

Zooming right out and taking a look at the monthly chart provides a very simplistic view of where gold is right now. Today you will find its price sitting right on a 10-year old diagonal support level based on the last two major closing price lows.

Since gold has so far failed to make its recent bounce off £1161 look convincing, there’s a growing chance the level will be retested. In fact, the monthly Relative Strength Index (RSI) is hinting there’s room for a further manoeuvre downward. If a double bottom fails to stop the rot, then focus may turn to the green diagonal – this indicates $1125 support.

Whether you believe the fundamental reasons for gold being undervalued or not, it is clearly evident from the Commitment of Traders report that bearish sentiment towards gold has reached extreme levels. It is therefore likely at some point something will give as speculators jostle for position. Once sentiment turns, it’s likely to be very quick.

Assuming a reversal does ensue, things will really start to get interesting over the coming 12-24 months if and when gold approaches its long-term diagonal resistance (red line). A breakout above the line would indicate that a major trend reversal is potentially underway. It seems probable that such a move would provide the necessary momentum required to break above the $1360-$1400 zone which has been pinning gold back for the past five years.

There are some cheerleaders for gold who claim the gold price should be at least 2-3 times higher than today. There is also data that suggests the real price or ‘Shadow Price’ of gold is many more multiples of today’s value, and that when you adjust the price of gold to take into account inflation it is at all-time lows. Perhaps that is why central banks have been ferociously increasing their stash of the yellow metal in a concerted effort that started just after the last financial crisis of 2008.

With banks loading up, hedge funds shorting to record levels, as well as the USA undoubtedly preferring a low gold price relative to the dollar, it appears everyone wants the gold price pinned back…for now.

 

Author: Stuart Langelaan

Disclosure: The Author currently holds a position or positions in the stock(s) and/or financial instrument(s) mentioned in the piece

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