Gold has had a nice run ever since we called the bounce and reversal at the major $1680 support level. Let me refresh your memory by showing you the weekly chart. And also because we might be heading back to this major level.
The two key price levels that gold traders and investors must keep highlighted are $1800 and $1680. If gold tumbles and we break below $1680 in upcoming weeks or months, then it would be a very bearish sign.
If gold does the opposite, and closes above $1800 then we would be continuing the path to retest previous highs and make new all time record highs.
But the $1800 is a very strong resistance level.
If we take things down to the daily chart, I want readers to notice the price action between August 9th-15th. Gold tried many times to break above $1800 after a nice rally. It failed to do so. Instead, on the 15th of August, gold printed a large red candle known as an engulfing candle. Simply a large bodied candle which ‘engulfs’ all the previous candles. It is a very bearish sign when this candle is printed at resistance zones.
I myself took a short and placed my stop loss just above $1810.
Now I know what you are all thinking. Why is it rejecting $1800? It would be easy to answer that this is a purely technical play, but I won’t do that. Although I really do stress the importance of technicals in your trading and investing.
There are two reasons which are causing gold to drop.
Firstly, let us start with the current market narrative. In these past few months, it has all been about inflation. After July’s US CPI data came in lower than expected, it seems there has been a shift in narratives. The markets seem to see this as inflation peaking. The narrative has now gone from inflation to recession.
But this can change! And it can change very quickly. On the day of writing, we heard that UK inflation came in at the highest levels in 40 years, and the Bank of England expects inflation to top out at 13% in October. Sure Europe is likely in a worse situation given the energy issue, but inflation may not have peaked yet in the US.
As a market participant, this means we need to highlight major inflation/Fed event risks. FOMC rate decisions, US CPI data, and something which will come out on the day of me publishing this article, FOMC minutes. Any of these things can shift the market narrative back to inflation.
The second reason is tied in with the first. I am talking about the US dollar.
The US dollar has been weak in recent weeks, but that has changed with the price action on the 15th of August. The same day gold printed that bearish engulfing candle at $1800. And this should be expected as gold and the dollar are negatively correlated.
The most important thing about this US dollar chart is the fact that we closed above the trendline. In other words, as long as the price remains above this trendline, the US dollar will be continuing its uptrend. A higher US dollar means lower gold.
Why would the dollar be rising? Maybe the market is already prepping itself to flip back to the inflation narrative. Maybe the market is already preparing for a bullish Fed and more rate hikes. Rate hikes not priced into the dollar market.
The second reason could be that money is running into the dollar for safety. But I discount this just because we tend to see a run into US treasuries and bonds at the same time. This is not happening currently and bonds are dropping. This means that option 1 is more likely as bond yields are rising and the dollar is rising.
In summary, it might not be fun for gold bulls as I expect gold to retrace back down to $1680 as long as we remain below $1800. If we break below $1680, then we will need to have a serious reassessment about the precious metal. Watch that US dollar chart, especially post FOMC minutes. If the dollar reverses, gold has a real chance of crossing above $1800.