In the two days following my last analysis, gold fell below its upward-sloping trendline from December, 2016 and tested the bottom of its July, 2017 channel.
It quickly rebounded from there and started bouncing around between the Dec., 2017 trendline and horizontal resistance at $1,300
On Friday, August 25, it finally broke through horizontal resistance at $1,300
I had argued that if it did this, it would probably stall out a little at $1306 and then move higher.
Instead, it stalled out at $1310 for a few days and then moved higher. So I was off by $4.
On Thursday, gold made a big move up and got stuck at around $1325
The question is: where does it go from here?
There are a number of fundamental factors influencing gold right now that seem to be pushing it up no matter what happens technically.
Here are a few of them.
This may seem counter-intuitive, but falling inflation in the U.S. is driving the price of gold up. This is because falling inflation implies that the Fed does not need to raise interest rates. So traders are beginning to be concerned that the rate-hiking cycle is nearing an end.
This is driving up the value of long-term U.S. Treasuries and down the value of cash held in a bank account.
But since gold is priced in dollars (not long-term bonds), this is driving up the price of gold.
Since Trump’s election, many investors have believed that bond prices are going to fall when Congress passes a budget-busting tax cut that pushes deficits higher. This is because the deficit is the “supply” of bonds. So when it increases, it tends to make bond prices fall.
If this were to happen, it would cause non-U.S.. investors to buy dollars and hoard them as they wait for bond prices to bottom at high yields.
This would push up the value of the dollar. Therefore, it would push down the value of gold when priced in dollars.
However, we are now nine months into this administration with no tax cut in sight. And a lot of conservatives in Congress seem to be opposed to increasing deficits.
At the same time, Democrats are not fans of tax cuts either. So it’s not clear how Congress will get the votes to pass the tax cut.
This disappointment in the market is causing downward pressure on the value of the dollar and upward pressure on the price of gold.
In Europe, bond prices have been rising for years as the ECB continued to buy bonds and artificially inflate their value.
But now inflation is rising and the ECB is under pressure to stop doing QE. This is the opposite of what is happening in the U.S. This is causing investors to sell their dollars to buy Euros and wait for German and French bonds to fall.
This causing the dollar to fall and gold prices to rise.
On top of all of this, Kim Yong Un continues to threaten Korea, Japan, and the U.S., causing fears of nuclear war in East Asia. This could cause a partial collapse of the banking system.
If this were to happen, gold would be very useful.
If these trends continue, we can expect gold to continue rising within the channel established in July. A fall to the bottom of the channel is an opportunity to buy.
If one of these factors changes (tax cuts get passed, inflation picks up, etc.), the channel may break. In that case, the fall will likely come to a stop at the Dec., 2016 trendline.
This too will present a buying opportunity.
Only if this line also breaks do we have to consider that maybe the trend has reversed.
Otherwise, the next opportunities to short will come when pullbacks are likely. These are at horizontal lines of resistance from the Summer of last year.
These are at $1344.10, $1352.37, $1364.20, and $1376.03
Trading is closed from 12:00 p.m. New York time to 7:00 p.m. New York time on the 4th due to the Labor Day holiday in the U.S.
Volume will also be low on this day, so watch out.