Gold Price Action Looks Bullish
Rudi Fronk and James Anthony, the cofounders of Seabridge Gold, comment on the factors they see as bullish for gold.
It now appears that the gold complex has successfully tested support. Gold held above $1305, the low for the year set on March 5 and above the psychologically important level of $1300. GDX, the gold stock ETF, held above the December 2017 low of $21.25. No new lows support the potential for an upturn. Gold closed up $33 for the week at $1349.90, well above its 50 day moving average at $1331.
Last week, gold broke through its downtrend line against stocks as demonstrated in the below weekly chart of the ratio of gold to the SP500. In our view, gold in a bull market has to outperform the stock market. It’s early, but this breakout above the blue downtrend line looks promising.
This breakout could be sustained if the SPs break down further this week. The SPs closed pretty much on their lows last Friday and just seven points above the February 8 low of 2581, as highlighted in the below daily chart of the index with the blue line marking the low for the year. Could a new low bring a deeper correction into play?
This coming Thursday is the last trading day of the month, which raises an interesting possibility. On a monthly basis, gold has established a string of higher lows since it bottomed in December 2015. The closing monthly high for gold prices since the 2015 bottom is $1358, just eight dollars above last Friday’s close. Closing above $1358 at week’s end could help to establish that gold has in fact entered a new bull phase. Here is the three year monthly chart for gold.
One final fact to consider. If you remember how the 2008 financial crisis unfolded, one of the key signals was the soaring TED spread…the spread between the risk free T-Bill interest rate and the overnight rate charged corporate borrowers in the eurodollar market. Essentially, this is a measure of the credit risk in the private lending market. Since mid-February of this year, the TED spread has skyrocketed higher. Something is amiss in the credit markets. Perhaps it is as simple as a lack of liquidity as U.S. corporations take money out money market instruments in order to repatriate funds under the new tax laws. Or could it be that increased Treasury issuance and Federal Reserve Quantitative Tightening (sales of assets) are crowding out the private sector? Whatever the explanation, it suggests another reason to opt for the safety of gold.
Gold Price Action Observations and a Look Ahead
Gold’s First Quarter of 2018
Joel Bauman – The gold price has been indecisive, to say the least. The 2018 price range has been set between $1,300 and $1,365.
Three swing-highs tested the upper $1,365 range. The first was on January 25, followed a by a retest a few weeks later on February 16. March 27 was the most recent stab at breaking the $1,365 price resistance.
Comparably there were three noticeable swing-lows made on February 8, March 1, and March 20 respectively.
These six price pivots are denoted by the red arrows on the daily gold chart below.
Looking more closely at the 2018 price range of $1,300 to $1,365, gold has been trading mostly below $1,332.50 – the midpoint between the $1,300 and $1,365 price range. The lower $1,300 price level has been the stronger price magnet compared to $1,365.
There were two sharp selloffs following the two most recent swing-highs, February 16 and March 27.
This first quarter of 2018 was comparable to the third quarter of 2016, which also seemed to find support around $1,300 and resistance around $1,365.
Here is a daily chart for the middle of 2016 (Q3 highlighted in the red box).
In both Q1 of 2018 and Q3 of 2016, the swing highs were descending in price, “lower highs,” and the last two swing highs of Q3 also were followed by a sharp decline.
On October 4, 2016, gold’s price eventually broke the $1,300 support level and subsequently sold off for following two months to a low of $1,122 in December.
Outlook for the Next Quarter of 2018
Going into the next few months, we will most likely see a retest of the magnet/support level of $1,300. This is based on 2018’s lower swing-highs followed by sharp selloffs and historic price consolidation around this $1,300 level.
It will be interesting to see how gold’s price action reacts to the $1,300 level if we retest. The question is will it quickly bounce and return to the $1,365 highs? Or maybe it will break the $1,300 support level and make a large price move to the downside similar to October 4, 2016. I anticipate we’re going to see something in between these two scenarios, with the price consolidating around the $1,300 level.
Considering the recent selloffs and lower swing-highs, I believe there is enough short-term selling pressure to retest and potentially break below $1,300.
If we break below $1,300, I do not believe we will see gold’s price freefall dramatically like we did from October through December of 2016. There are some well-established technical support levels that exist now that did not exist in the middle of that year.
For example, the price swing-low of $1,122 that was formed in December of 2016 created the long-awaited multi-year higher swing-low that many traders look to confirm a change in trend (The multi-year higher swing-low is marked by the red arrow in the graph above).
Traders are looking to buy dips. There are a number of lesser support levels that formed between $1,122 and $1,300 during the uptrend of 2017. Traders will gladly use these 2017 support levels to set their buy limit orders.
In other words, if we see the price of gold break below $1,300 it probably won’t be long before the price returns to $1,300 or higher because of all the support. Hence, I believe we are going to see at least another quarter of consolidation in 2018.
- This first quarter of 2018 is looking very similar to 2016’s Q3.
- We have support at $1,300 and resistance at $1,365
- Gold currently is on its way back down to test the $1,300 support level
- Gold may hold or break below $1,300
- Lastly, I expect gold to consolidate around $1,300. Even if breaks below $1,300 it probably won’t drop far because of the strong support levels.
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