Okay gold bulls, we NEED to talk. Gold’s technical nightmare is coming true.
I have alluded to this in many recent Market Moment posts, including my recent post on Silver. If you are heavily invested in mining, I think it would be prudent to hedge for some metals downside. I realize I am saying this while there is an overall market sell off. So what I am talking about means a full fear sell off. What will be the catalyst? Perhaps the Fed next week and their hawkish tone.
With inflation rising, many are frustrated that gold and silver aren’t heading higher. Not performing like the inflation hedge as many believed. Instead, with rising interest rates, it makes it less attractive to own precious metals which yield nothing when compared to bonds, the other risk off safety asset.
Now I know what you gold and silver bulls are saying. Vishal! When you consider real inflation as opposed to nominal, bonds are still yielding negative! And you would be absolutely correct. Herein lies the opportunity for holding gold and silver for the long term. But don’t just take it from me, take it from billionaire Ray Dalio who has been saying this for years. He holds gold because ‘cash is trash’. He also holds it due to what he believes central banks will have to do: print more money.
When you look around the world, you can see the many problems. It seems the only solution to keep this current system going is to lower rates and print more money. Inflation is being blamed on Russia and supply chains but it is very important to note the real definition of inflation: money supply increases more than the output. Or simply put, there is more money in the system competing for the same number of goods and services because productivity hasn’t increased. With the money printing that governments are currently implementing and will be implementing in months to come, inflation will stay elevated for longer than people think.
When that confidence crisis in governments, central banks and the fiat money comes, you will want to be holding gold and silver in my opinion.
But for now, gold and silver will be part of the everything sell off just like we saw in 2020. The US Dollar will be king.
Let’s start with gold first:
Gold was retesting the major $1700 level. It had a lot of bulls excited. Major support and gold was expected to bounce from here. A normal trade at support is to go long and place a tight stop loss below. Those stops have been taken out.
A big red candle took us below support and we have a breakdown. Today’s candle took us up to $1680, a retest of the breakdown zone. From a technical perspective, this retest provides an opportunity to sell. What was once support has now become resistance. This leads me to believe a short is in play.
But what has me worried the most, and is the stuff of nightmare for gold bulls, is the weekly setup:
After holding $1680 as support on the weekly chart since 2020, gold is looking to finally break below. Some would say this even constitutes a double top pattern on gold. Whatever way you want to put it, gold looks bearish and $1500 is in the cards.
The hope for bulls is that the breakdown does not trigger. If we get a weekly candle close below $1680 today (Friday September 16th) or in the next few weeks, the break is on. BUT if gold can remain above $1680 on the weekly, we can see a major bounce like we saw from this price zone recently in mid July 2022.
My advice is to watch that daily chart to see if we can close back above $1680. If we can, it increases the probabilities of holding above this major support zone on the weekly.
The most important chart to watch is the US Dollar (DXY). Gold being the anti dollar, has a negative correlation with the dollar. When the dollar drops, gold rises and when the dollar rises, gold drops.
It isn’t a surprise that the dollar is at resistance while gold is at support. 110 is a major zone for the dollar and a breakout higher means gold falls. The dollar is failing to surpass resistance so there is a chance for a pullback. This would mean gold rises and likely remains above $1680.
But we have a major dollar moving event on the 21st of September. We will hear from Jerome Powell and the Federal Reserve. The market already expects and has priced in a large rate hike. The big question mark is the rhetoric. Will Powell remain hawkish at the press conference? Will the Fed make it clear that more rate hikes are coming? Will they make it clear on how large these hikes will be? All questions that need answering and the dollar will be volatile during this press release.
Circle that date on your calendar. The price action on the dollar could literally make or break gold.