The charts of gold have gotten very interesting in recent days and it seems gold may be setting up for some highly volatile trading in the coming weeks in a reflection of the continued uncertainties around the direction of the U.S. dollar, the sovereign debt crisis, the U..S debt debacle, the health of the economic recovery and the possibility of QE3.
Starting out with a look at the possible up and down trading to come in gold, it seems likely that gold may soon test support found in a range between $1,550 and $1,560 per ounce before powering higher to a new nominal record high at some level between $1,630 and $1,690 per ounce. However, this possible upside trading is likely to be followed by a decline to gold’s long-term trendline at about $1,470 per ounce or gold may simply decline to that lower level without moving higher first.
Such potential trading is dizzying at best as it seems very possible that gold is going to trade all over the place before putting in a decent decline that will have the ultimate effect of realigning gold with its beautiful long-term uptrend and a realignment that should take gold much higher than any near-term nominal record high at some point later this year.
Most of this volatility in the near-term is likely to be driven by the vagaries of the dollar index that has been range bound between about 74 and 76 for nearly three months now and it seems likely to stay stuck in that rough range for a few weeks longer. Until such “directionless” trading in the dollar index is resolved, it could remain a major source of true sideways trading in gold as has been the case for the last few months as well.
Interestingly, however, driving that sideways trend in the dollar index are the fundamental factors that may help gold move higher after its potential upcoming bout of wild whipsaw trading and all such factors can be summarized by one word: uncertainty.
First, the worst case scenario around the sovereign debt crisis is one that seems more and more likely with each lurch forward into that this crisis and that is default. Despite the best attempts of eurozone leaders to patch together piecemeal solutions to prevent a restructuring of Greek debt in the near-term, it seems nearly certain that such a restructuring will occur at some point and an event that will result in losses for those bondholders and real contagion fear that could wrack the very foundation of the eurozone financial system.
Second, the U.S. government has fallen into a multi-trillion dollar deficit gully that has once again pressured the need to raise the debt ceiling. Unfortunately, the only real way to climb out of that hole is by raising taxes and cutting many programs and benefits and until such action is taken, the U.S. will be in a constant game of raising its debt ceiling and something that creates unwanted default uncertainty for investors. Such uncertainty may be minor, however, in relation to the inescapable uncertainty of whether the U..S government can successfully shoulder a 30-year mountain of debt that proved to be unsustainable to the private sector as was shown by the first revulsion of the financial crisis in 2008.
Third, the economic recovery from the Great Recession has been tepid at best with an unemployment rate above 9%, a housing market that is officially in a double dip with home prices below early 2009 prices and a fragile financial system that is highlighted by anemic bank lending. All such factors are contributing to inconsistent consumer spending that weighs on the aforementioned weak employment situation and poor bank lending in a cruel cyclical manner. It will be tough for GDP to move much above current levels under the weight of these fundamentals.
And this brings me to the last fundamental consideration around gold’s likely trading in the weeks and months ahead and that is the strong possibility of QE3.
It seems likely that the Fed will have to grease the economic system once again by printing some more money due to the pressures created by the first three factors and something that should break the dollar’s sideways direction with another move down and take gold out of any volatile up and down trading as investors move toward its alternative currency and safe-haven status against the world’s increasingly debased reserve currency or the US dollar.
Put otherwise, gold is one of the great beneficiaries of the Fed’s attempts to "reflate" the U.S. economy as gold has held its value through all of the turmoil over the last several years.
Returning now to the potential for some very volatile trading in the near-term, it seems somewhat likely that gold will fall marginally today, tomorrow or early next week due to a reliably-bearish Pipe Top showing in gold’s daily chart that appears to have teamed up with a possible Island Reversal.
The target of this possible pattern combo is $1,562 per ounce and just above its sideways trend of the last few months and this turns the question to whether gold’s sideways trend shall suck gold back down into its range of roughly $1,491 to $1,549 per ounce or whether gold shall manage to defy that trend by trading higher yet.
Clearly there is no way to know the answer to that question now, but I think part of it will hinge on how gold trades around support found right around $1,560 per ounce and it seems there is strong reason to think gold may find a way to bounce off of that level or thereabouts.
Specifically, a two year chart of gold’s Ascending Trend Channel strongly suggests gold will find support right above its sideways trend if gold should fall there as seems likely in looking at the chart on the previous page. It seems just as likely in looking at the chart below considering a drop to $1,560 per ounce would put gold on that third trendline from the top and this is a trendline gold has tested and traded around in the past before making big moves up.
Perhaps the more important message of the chart above, however, is the fact that any such potential consolidation on support around $1,550 to $1,560 per ounce may power a move higher by gold to the top ascending trendline or to some level well above that trendline.
In other words, the chart of gold’s long-term Ascending Trend Channel seems to suggest that gold has a good shot of trading to $1,630 per ounce and even more likely is a move to some level between $1,630 and $1,690 per ounce as this chart shows most of those peaks putting in a top well above that trendline.
However, just as clearly as this chart shows the likelihood of another record nominal high ahead, it also shows that gold is very likely to make a decent decline in the next few weeks and one that is nearly overdue at this point.
I say this because the chart above shows gold’s tendency to trade up through its Ascending Trend Channel in rounds of peak and trough trading with the four rounds shown above including at least one peak above the top trendline and one trough to the bottom trendline or thereabouts.
The current round of peak and trough trading has the peak above the top trendline, but it has yet to put in the trough that will mark the end of this round of peak and trough trading.
Whether this trough shall come after yet another magnificent peak and new nominal record high is put in is unclear, but it is rather clear that this trough will come and based on past timing, this trough looks likely to be made within weeks.
Interestingly, though, and as was the case when gold made its last visit to that bottom trendline back in late January, such a trough will have the effect of strengthening gold’s absolutely gorgeous long-term uptrend that needs no markings to showcase its stunning nature.
It seems, then, that continued uncertainty around the economic recovery, the solvency of sovereign nations and the value of fiat currencies should propel gold higher by the end of the year and this is a technical likelihood that stands out in gold’s long-term charts.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD, SLV over the next 72 hours.