The New Bottom for Gold

The New Bottom for Gold

Fear is gone. Calm markets are here.

Or so you might think.

There’s been a recent easing of geopolitical tensions, which has calmed global markets.

With the heat out of the market for the moment, the US dollar has risen and the price of gold per ounce is down US$40.

Does that mean the gold bull market is over?

Far from it.

In fact, now could be the perfect time for Aussie investors to seriously consider adding gold to their portfolio.

Here’s why…

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While gold does thrive when there’s chaos around the world — they don’t call it the ‘fear’ metal for nothing — it also moves higher in calm markets too. Especially when interest rates are rising.

Right now, the gold price is falling because of the strength of the US dollar.

The price of gold has an inverse relationship to the US dollar. So when the US dollar is strong, the price of gold is weak. And when the US dollar falls, the price of gold rallies.

The fall in the gold price over the past few weeks merely reflects the US dollar picking up some strength.

But it won’t last.

At the start of May I explained in a video that a fall in the gold price was coming.

Since then, gold has traded to where I expected it would.

All told, the price of gold is merely pulling back to a key technical level. In a couple weeks, I expect the rally to begin again.

Here’s why…

The chart below shows the daily gold price chart going back over the past two years.

Gold price in US dollars — daily/yearly

Source: CMC Markets

The different coloured trend lines you see were drawn each time gold made a ‘higher low’ — using the December 2016 as the starting point.

Over the past two years, it’s become apparent that these trend lines are providing support for the price of gold.

Furthermore, when you overlay a Fibonacci fan over the chart, these trend lines all fall on key Fibonacci fan lines. Essentially, the Fibonacci fan is a charting technique to help identify key levels of support and resistance.

That the trend lines fall on Fibonacci fan lines is a very bullish indicator for gold. A rising Fibonnaci fan (which is the case with gold) provides higher support prices as assets trade up.

Rising Fibonnaci fans are generally good indicators of medium- to long-term bull markets. And the longer the fan, the stronger the bull market.

In fact, the longer the purple line remains uncrossed, the stronger the bull market is likelier to be.

This line is also important in revealing what gold’s price floor could be.

That’s because the purple line sits near what’s known as the 61.8% Fibonacci level. This is a very crucial level of support and resistance for stocks. Falling below this 61.8% level (purple line) would be a sell signal for gold.

In early May, it became clear to me that gold would fall to the purple line (circled in green) around the US$1,290–1,285 an ounce level.

And now, just a few weeks on, the price of gold has fallen right into that green circle.

So, what’s the next likely move from here?

As mentioned, the purple line — the 61.8% Fibonacci level — is a key level of support. It’s very unlikely that gold will fall through this level. Gold may trade down to US$1,280 an ounce for a day or two, but it won’t stay there for long.

The price of gold tends to rise with each rate hike from the Federal Reserve Bank. All Fed rate hikes since December 2016 are marked on the chart with a black arrow.

As you can see, the price of gold tends to fall before a Fed meeting, before beginning its next leg up shortly after.

Importantly, the next Fed meeting is less than a month away.

History would suggest that the current fall in the gold price is temporary.

And it means the gold price could begin its ascent again very soon.

Gold windows like this don’t stay open for long.

But if you act quick, you could potentially take advantage of gold’s likely imminent move higher.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia