Gold Pricing Softens, But This Rally Still Has More Upside Potential

The fact that gold pricing is trading under pressure is not a big surprise, and actually can be viewed as a well-needed pause in the rally currently underway. After trading to $1238 per ounce in mid-December of last year, gold prices have gained almost $90 before hitting resistance at $1327 late last week.

Historically speaking, rallies in the precious yellow metal will move pricing roughly $100 during a moderate rally, and $160 or higher during times of strong price moves in gold.

It also must be noted that, except for in rare instances, rallies in the precious metals unfold as a series of legs or waves separated by shorter periods of consolidation and price corrections. What traders and investors could be witnessing is simply the first leg of an extended rally that will move gold pricing higher following market consolidation and a shallow correction.

Our technical studies, which are primarily based upon Fibonacci retracement, show that the first support level in gold resides at 1306, which is the 23% retracement of the $90 rally that has just occurred. Below that is the 38% retracement which falls at 1293 as well as a 50% retracement at approximately $1280 per ounce.

As long as gold pricing remains above 1300 to 1306, the current outlook remains extremely bullish for gold.

What is significant is the fact that this most recent rally occurred in tandem with the U.S. equities market running to record highs on a fairly consistent basis. Typically, these asset classes do not run in tandem.

In 2009, immediately following the implementation of quantitative easing by the Federal Reserve, we had U.S. equities and gold staging significant rallies. However, gold pricing topped towards the end of 2011 after reaching its record high above $1900 per ounce, and at the same time, U.S. equities continued to run to higher ground. In fact, the rally in U.S. equities which began in the middle of 2009 continues to this day.

From 2009 up until the middle of 2015, gold pricing was in a defined and deep multiyear correction. It was not until the end of 2015 that gold prices bottomed at approximately $1040 per ounce before staging a multiyear recovery which is currently still in play.

U.S. equities outperformed gold pricing last year by a margin of 2 to 1, with the Dow Jones Industrial Average gaining roughly 25% and gold gaining roughly 13% during 2017. What is most impressive is the fact that gold was able to have such a respectable price gain in light of the incredibly strong risk-on market sentiment.

Wishing you as always, good trading,