Gold shows signs of exhaustion to the rally

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Raw Gold_Volatility

Gold prices staged another bullish rally this week, trading near $1300 levels, but there is evidence of a sign of exhaustion to the rally, which could see gold prices post a correction in the near term

Gold prices recorded another feat this week as prices rallied to a 1 year high, trading briefly above the $1300 handle, a level that was last seen in January 2015. However, unable to capitalize on the gains, gold prices failed to close above 1300 and instead closed the daily session in a doji on the same day. While it is still early to speculate if the bull run is over, it is clear that the longer term bullish trend is currently being established, which could potentially see gold prices likely to push higher over the coming quarters. Already, gold has established itself as the best performing asset along with the yen, as equity market rally has nearly fizzled out, trading flat so far, despite posting a strong recovery off the first quarter declines.

One of the biggest reasons for the gold rally has to do with its historical behavior. Gold tends to appreciate during the US Fed rate hike cycles and this time is no different. In fact, after the Fed hiked rates in December, gold prices simply broke out from its declines with a strong momentum seeing little to no pull backs on that rally. Currently, gold sits at an interesting juncture. No matter what the Fed does, gold prices are likely to pull higher. Higher interest rates make gold more attractive compared to treasuries while at the same time, monetary policy uncertainty echoing talks of negative interest rates or more QE is also supportive of gold prices.

Gold – Technical Outlook

Few weeks ago we called out the bullish pennant pattern in gold, which formed after a period of consolidation following the Dec/Jan rally. Price action traded near the 1283.65 handle, pushing to 1300 before currently falling back. Support is seen at 1240 to the downside. But if last week is anything to go by, a failed pattern could no doubt signal a strong momentum led declines or rallies, in which case gold could see the dip to 1200 – 1193.55 support zone.

Gold – Daily Chart, bullish pennant continuation pattern
Gold – Daily Chart, bullish pennant continuation pattern

On the weekly chart, a zoomed in view shows that price action stalled near the previously identified resistance level of 1275.78 – 1284.57. Although last week’s price action closed above this level, it wasn’t a convincing pattern. Depending on how this week’s price action closes, we can expect to see the near-term bias being established. Support is seen near 1250 from the weekly chart while a break below this support could see gold test the 1200 – 1176 levels in the longer term. The weekly 13 RSI also shows a hidden divergence with the recent highs being, in fact, a lower high compared to the 1307.38 highs formed around early January last year.

Gold – Weekly Chart: Hidden Divergence
Gold – Weekly Chart: Hidden Divergence

Looking at the recent price action on the daily chart, it is evident that gold posted a bearish divergence with the high highs not being confirmed by the RSI. Support is seen near 1183 – 1178 region, which is likely where gold prices could see establishing support. The correction view could, however, be invalidated if prices find support near the 1250 handle, in which case we could see another bullish rally push prices back to 1300 if not higher. We also need to see evidence of a lower high in prices to validate the view of a correction to 1183 – 1178.

Gold – Daily Chart: Bearish Divergence
Gold – Daily Chart: Bearish Divergence

In conclusion, gold looks to have formed a top in the near term which could put new long positions above the 1270 handle at risk. A lower high is needed to confirm that gold could post a correction to the rally. Support at 1250, 1200 are essential in this aspect, while support near 1178 – 1183 looks like an idea level for gold to establish support which could see a potential break above the $1300 handle.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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