Genuine concerns could lead to a sustainable rally in gold

Although gold prices are only modestly higher in trading today, it is the fundamental rationale that is creating the current market sentiment, which has certainly shifted to a bullish demeanor. On a technical basis, the fact that gold is now trading back above its 200-day moving average is precisely what market technicians wanted to see to gain confidence in gold’s long-term potential to gain value. The last time gold traded and closed above its 200-day moving average was February 1.

What would follow would be a steep correction taking gold prices from $1865 to a low of $1672.70 on March 8. This would mark the first test of gold pricing stabilizing and market sentiment shifting from bearish to bullish. Through the month of March, gold hit a high of $1756 on the 18^th, and the subsequent selloff formed a pattern simply called a rounded top. Gold retested the lows achieved during the first week of March on March 30 and 31^st. This created the double bottom that was significant in that it indicated the real potential that gold pricing was oversold with the potential to move higher. And that is exactly what market participants witnessed, a slow and methodical rise to higher pricing in a stairstep manner.

This type of rally will have periods in which prices climb to a new higher value and then consolidate, moving sideways and forming a base at this new higher price. The first period of consolidation following the double bottom occurred roughly at the top, achieved on March 18 when gold was trading at $1756. This pattern repeated itself as gold gained value with price advances followed by consolidation as it formed a base at the next higher level at approximately $1768 that formed a strong level of support which corresponds with a 50% retracement.  The data set we used for the retracement begins at $1447.90, the lows achieved in March of 2020, to the all-time high that occurred in August when gold hit $2088.

At the end of April, gold had a strong price advance in a rally which moved pricing to the 61.8% Fibonacci retracement, which occurred at $1844. However, gold pricing was still below the 200-day moving average, which was taken out in trading yesterday.

The rally, which began in March 2021, got its second wind as government data indicated a huge uptick in inflation. Coupled with the Federal Reserve’s mandate to let interest rates run hot, over 2% became the fuel that created the current bullish market sentiment and has moved gold substantially higher from the lows seen on March 8. Since the beginning of this rally, we have now seen gold move roughly $200 higher.

As of 5:40 PM EST gold futures basis, the most active June contract is currently fixed at $1869.80, which is a net increase of $2.20 (+0.12%). All things being equal, as long as inflation continues to run hot and the Federal Reserve maintains its current mandate to allow inflation to increase, we could easily see gold pricing challenge $1900 with our current target of $1947.90. This is based on the 78% Fibonacci retracement.

Wishing you, as always, good trading and good health,