Gold continued to build on last week’s gains, adding nearly $7 per troy ounce or 0.5% as of the close on Friday on the New York COMEX futures exchange. The final print for the week was $1,229.
Given the surge seen over the past two weeks, it is time to place the price action into proper context. Do more gains lie in store and can gold recapture the $1,300 level before the end of 2018?
Let us turn to the observable data.
Gold Breaks Downtrend
Gold has finally broken the linear falling-channel that defined its April through August decline of $1,369 down to $1,160. Note below how the dashed (teal colored) trend channel which held the price lower over these past six months has finally been broken.
This is a positive first sign for stability from a technical standpoint.
However, larger context remains key. Gold is still below its rising 2015 – 2018 trendline (royal blue), a level which saw buyers emerge from the 2015 bottom up through the breakdown last August.
Where does this leave the precious metal?
Broken Support Turns To Resistance
There is a principle in technical analysis of the markets which says: “Broken support turns to resistance.”
What this means is that, all things considered, support levels which saw buyers emerge in the past but which have subsequently broken should be expected to now see former buyers sell near break-even.
In practice this principle means that we would expect that when gold gets back into the vicinity of its now-broken (blue) trend near $1,270, sellers will show up. These sellers may be exiting the market now that the price has returned to near their original entry point. The result is that gold should round out near the broken trend, and begin to decline once again in early 2019.
It is also worth noting that the 50% Fibonacci retracement of the entire April through August $1,369 to $1,160 decline comes in at $1,268. This matches within two dollars the $1,270 resistance level identified above. When two separately-derived resistance levels reveal nearly the same target, this confluence zone should be expected to see strong selling emerge.
Where Does Support Exist?
After gold reaches its resistance zone between $1,268 – $1,270, where would support exist if another decline were to emerge as we expect?
The charts show that strong support exists near $1,124, which was the December 2016 low. It may be hard to imagine that gold could fall this far in 2019, but assuming the above resistance zone holds, we would expect gold to make a new low below its $1,160 August print on the next retracement. $1,124 is the next logical support that gold would test as it attempts to form a long-term bottom.
GDX / Gold Relative Model
A final form of analysis we can use to gauge potential support levels for gold is the gold miner / gold relative valuation model. This model compares the relationship between the companies that dig gold out of the ground and the very metal they produce.
Below we show the GDX gold miners fund on top, with the price of gold immediately below it, both plotted along the same timescale.
We can see that the GDX miners (top), which closed near 20.0 on the index this week, are back to a level originally observed in November, 2016 (green highlight). Viewing the price of gold itself during the same time (lower green highlight), we can see that this 20.0 GDX level corresponded with $1,170 gold at that time.
Thus, the GDX index is suggesting that lower metals prices are in store for the intermediate future, most likely following the end of the current rally.
Note that this signal also sometimes works in reverse, meaning the GDX miners often stop falling for weeks before gold itself, in essence predicting that the metal is soon to bottom. We anticipate this signal will manifest in early 2019 on the next gold bottom, and we will bring you that analysis when we observe it, as it may help in timing your physical metals purchases.
Takeaway on Gold
Gold has significant resistance ahead in the $1,268 – $1,270 range, which is expected to cap prices over the short run. A further decline may be in store by early 2019, which is being suggested by the mining sector. Into 2019, the sector may be setting up for an important low similar to the 2015 bottom. Investors should continue to monitor the price trends closely as this window approaches.
