Gold Consolidates but Bullish Market Sentiment Continues

Every day that gold futures remain above $1500 per ounce is strengthening the resolve that the key psychological level of $1500 is becoming a strong area of support. However, this assumption has a tremendously large caveat, and that is that price changes seen in gold are almost entirely due to the fundamental events such as the current trade war between the United States and China, global central banks along with the Federal Reserve moving towards a new era of quantitative easing, as well as relative strength or weakness in equities markets worldwide.

Nonetheless yesterday’s dynamic move in gold taking its price above $1500 for the first time in six years is absolutely significant. Traders have been witnessing a ceiling in gold pricing right around $1370. Over a three-year period, market forces based on fundamental events have curtailed any strong upside potential which resulted in gold breaking above the long-standing major resistance at that price point.

That ceiling was established immediately following the lows achieved at the end of 2015 into the beginning of 2016 which signaled the conclusion to the multiyear correction which began in the middle of 2011 when gold reached its lowest price point approximately $1040. The first rally after hitting those lows took gold pricing sharply higher as a $300 rally took gold approximately $1375 before trading lower.

The correction that followed lasted throughout the last half of 2016 and concluded with gold trading to a low of approximately $1125. This was the first technical indication that the long-standing multiyear correction had ended. The fact that gold traded to a higher low than the previous low which followed the first instance of gold trading to a higher high than the previous high provided solid technical evidence that the correction had concluded and that market sentiment in gold flipped from bearish to bullish.

This new bullish market sentiment was tempered by the fact that on each subsequent rally gold would trade as high as $1370 but that price point proved to contain insurmountable selling pressure because in each and every attempt market forces took gold pricing lower once reaching $1370. At the same time gold traded with a series of higher lows which created a technical pattern known as an ascending bottom with a flattop.

As recently as three months ago that changed when in June gold opened at approximately $1311, and traded to a high of $1440 before closing the month out with significant gains just above $1400 per ounce. Last month gold closed at the highs achieved in June. However, it was August which is still in its first week before market forces would move gold pricing above $1500 for the first time since April 2013.

It is for that reason that the most recent price gains in gold are extremely significant in that they indicate a major shift in market sentiment as we have seen gold once again act as a safe haven asset allowing market participants a modicum of safety in a highly volatile and risky market. The future direction of gold will be highly linked to multiple fundamental events. First and foremost is the outcome of trade war negotiations which will occur in September, the initiation of tariffs by the United States on the remaining $300 billion worth of Chinese imports on September 1, and future actions of the Federal Reserve as well as global central banks will be the key factors which will shape gold pricing throughout the remainder of the year.

Wishing you as always, good trading,