What will gold do next? (Update)

On 18 October I wrote an article which attempted to answer the question, what will gold do next? Today’s article provides an update on the situation with gold and tells traders and investors what to look for in the days and weeks ahead.

Having consolidated for almost a year, gold began a new uptrend in late August. However, after running all the way from $1,601.20 on 15 August to $1,798.10 on 5 October, a move of 12.3%, the yellow metal started a much needed period of consolidation, and that’s where we are now.

The chart below was the one I showed on 18 October, when I said, “Although gold is still some distance above the lower end of the blue uptrend channel, the stochastics indicate that short-term momentum is currently to the downside (red circle). If gold continues to fall it should find support at the lower blue line at around $1,700”. And as the second chart below shows, that’s exactly what we saw.

18 October chart: A 1 year chart of gold (Click on the chart for a larger version)

18 October chart: A 1 year chart of gold (Click on the chart for a larger version)

Today’s chart: A 1 year chart of gold (Click on the chart for a larger version)

Today’s chart: A 1 year chart of gold (Click on the chart for a larger version)

Charts courtesy of stockcharts.com

Gold bounced off an intraday low of $1,698.70 last Wednesday and the stochastics are now beginning to turn up (red circle), indicating that downside momentum may have subsided and we may be about to move to the upside.

The dip down to the $1,700 area generated a decent amount of buying, particularly in India where buyers took advantage of the drop in order to purchase gifts for the Hindu festival season which peaks next month with Diwali.

On the 18th I wrote that the US dollar “is now testing the support of the intermediate-term trend channel” i.e. the green dotted line on the charts below. However, as the second chart below shows, the dollar bounced nicely off this trend line (red circle) and has since resumed its mini uptrend.

18 October chart: A 1 year chart of the US dollar index (Click on the chart for a larger version)

18 October chart: A 1 year chart of the US dollar index (Click on the chart for a larger version)

Today’s chart: A 1 year chart of the US dollar index (Click on the chart for a larger version)

Today’s chart: A 1 year chart of the US dollar index (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The stochastics on the US Dollar are also beginning to turn up (red circle) indicating that at least in the short-term the uptrend may continue.

The bottom line

There is still potential for further downside in gold (and silver) particularly as the US dollar seems to have found its footing, though as I have pointed out before, it is possible for the dollar and gold to rally simultaneously.

The question is, will these lower prices attract enough value buyers to put a floor under the price of gold, or will the $1,700 support level give way leading to further weakness?

Personally I think we are likely to see further weakness in gold, and if we do it will quickly drop to around the $1,670 to $1,680 area where it ought to find strong support.

As I said in the previous article, gold “needs to break above the $1,805 area before it can continue its advance. However if gold can break through $1,805 with conviction, and establish a close above that level on the weekly chart, then it’s likely that it will move quickly higher towards the $1,900 milestone.”

From a macro standpoint gold is in need of a new catalyst since the Fed’s announcement of QE3 and the recent actions of other global central banks has now been priced into the market. In many ways gold is in limbo – along with other markets – awaiting the outcome of the US election on 6 November. If President Obama is reelected it will be bullish for gold whereas a Romney Presidency may well be bearish. More on this in the coming days.

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