I was fortunate to work for and eventually manage one of the world’s leading bullion dealing businesses for Philipp Brothers, Salomon Brothers, and Phibro in the late 1980s and early 1990s. During those years, the price of gold spent most of the time trading between $300 and $400 per ounce and silver was below the $6 level. Today, the lustrous metals trade at multiples of those levels, and it looks and feels like both are building cause to move even higher.
Gold and silver are the oldest forms of money; they are the ultimate hard assets with long histories of value. An ounce of gold, whether in bar or coin form, glitters and the density of the metal makes it feel significant when held in one’s hand. Gold has been a part of the human condition for thousands of years. Governments across the world hold the metal as part of their foreign currency reserves which validates its role as money.
Gold reached its all-time nominal high in 2011 at $1920.70 per ounce and has not declined below $1000 since 2009. In 2016, gold reached a high of $1377.50 and then corrected to the downside. In 2017, the yellow metal has been making a series of higher lows and higher highs. Concentrated selling during illiquid times in the European and Asian time zones in late June and early July could not cause the lustrous metal to negate its bullish trading pattern as it has snapped right back to near the highs over the past three weeks.
The market absorbed the flash crash selling
A pair of flash crashes that occurred on June 26 and July 6 did lots of technical damage to the prices of gold and silver. The first crash occurred during London trading hours when approximately 18,000 contracts or 1.8 million ounces of gold selling hit the futures market over a sixty-second period. The second flash crash came during Asian trading hours when over 40 million ounces of silver futures hit the market in one minute during a time when the market could not handle the concentrated volume. The technical damage in silver was severe as the price fell below technical support and has not been able to climb above its resistance level at the June 29 highs of $16.915. However, gold absorbed the flash crash selling and is now approaching the $1,300 per ounce level once again. Source: CQG
As the daily chart highlights, the selling that occurred at the end of June and in early July caused December COMEX gold futures to fall to lows of $1,211.10 on July 10 at which point the yellow metal turned around and moved to highs of just over $1,280 on August 1. The last time gold was $1,280; silver was trading at a high of $17.40. Gold had done a lot better in the aftermath of the pair of flash crashes than silver as the dollar and most recent statement from the Fed created a bullish environment for both metals.
The dollar and the Fed’s statement are supportive for gold
Precious metals have had peripheral vision over recent months as they have been reacting to moves in the dollar and interest rates. The dollar had been steadily dropping since the January highs at 103.815 on the dollar index. Source: CQG
As the weekly chart shows, the dollar index fell to lows of 92.39, down 11% since trading at the highest level since 2002 at the very beginning of 2017. A move of 11% in a currency, particularly the reserve currency of the world, in seven months is a massive correction. While the weaker dollar had been supportive of the price of gold, the yellow metal has kept one eye on interest rates which has caused the rally to proceed with extreme caution.
The Fed did lots of hawkish squawking earlier in 2017, and the central bank hiked the Fed Funds rate twice already this year. In June, Janet Yellen and other members of the FOMC told markets that balance sheet normalization would commence over coming months, and the legacy of QE would roll off the Fed’s balance sheet to the tune of $50 billion each month. The “normalization” amounts to quantitative tightening and the prospects for higher interest rates weighed on the price of gold (and silver) even though the dollar continued to move to the downside. However, in the wake of the July meeting when the Fed seemed to backtrack on the hawkish statements of past months, the prices of both precious metals recovered with gold taking the lead. The combination of a bounce in the bond market causing interest rates to move lower and a continuation of selling in the dollar have caused gold to climb towards its technical resistance level on the upside. The Fed and the path of least resistance for the dollar created a potent bullish cocktail for the gold market. However, last Friday a positive jobs report which included not only a strong employment picture but growth in wages caused the dollar to bounce back to the 93.416 level on the dollar index and the prices of precious metals moved to the downside. Gold closed the week around the $1,265 level while silver was around $16.27 per ounce.
The slow and steady climb towards $1,300 per ounce
The price of gold has not exploded to the upside over recent sessions following the latest Fed meeting and what seemed like new lows almost every day in the dollar index. Perhaps the flash crashes of late June and early July remain in the mind of potential buyers for the yellow metal who need more data and confidence to step up to the plate and pull the trigger in gold on long positions. Gold has fared better than silver since late June. Silver fell to the lowest price since April 2016, while gold’s low was slightly higher than its March 2017 bottom. Source: CQG
The daily pictorial of COMEX gold futures shows that the price traded to just over the $1,280 level on August 1, and technical resistance stands at the June 6 highs of $1,305.50 for the yellow metal. Above that price, gold will put in yet another new high in 2017, and the target on the upside will become the 2016 highs at $1,377.50 per ounce. While open interest, the total number of open long and short positions on COMEX gold futures declined from over 491,000 contracts in the middle of July to just over 432,000 on July 27, a decrease of 12% when gold was rebounding, the reason for the decrease could be related to the flash crashes. Rising price and falling open interest tends not to validate an emerging bullish trend in a futures market. However, potential buyers are likely standing on the sidelines waiting for gold to make a new high as validation that the yellow metal absorbed the flash crash selling and the danger of another selling attack on the market has receded. The metric stood at around the 458,000 level on August 3 before the price moved lower last Friday. We are likely to see a sudden spike in the technical metric if the price moves above the $1,300 per ounce level in the weeks ahead as longs will return to the market. Gold is currently in overbought territory on the daily chart, but the weekly and monthly technicals for the yellow metal continue to support gains even after Friday’s correction.
Is $1,400 possible in 2017?
As the weekly chart illustrates, if gold can get above the $1,300 per ounce level it could have a clear path to the 2016 highs at $1,377.50. Weekly price momentum in gold is higher as the price of the yellow metal has moved to the upside for three consecutive weeks, since the second flash crash before posting a loss last week. Gold is likely to run into some light resistance at the $1,338.30 level, the highs from election night in November, but the 2016 high stands as the critical line in the sand for the gold market at this point which has been making higher lows since December 2015. While the weekly chart for gold looks bullish, the monthly looks even better.
The monthly chart is bullish, and above $1,428 we could be looking at new highs
From a technical perspective, price momentum in the gold futures market crossed to the upside back in April, and the events of June 26 and July 6 did nothing to change the path of least resistance of the yellow metal on the monthly chart.
The monthly chart highlights that gold has been consolidating in a range from just below $1,200 to just under $1,300 per ounce through the first seven months of 2017. With the dollar flirting with critical support at 91.88 on the dollar index and bond prices edging higher, it is possible that we will see a breakout to the upside in gold before the end of 2017. A move above $1,300 per ounce will focus gold on the 2016 highs at $1,377.50. We are likely to see a flood of buying in the market if gold can make a new high for 2017. If the yellow metal challenges and conquers the 2016 highs, the next technical level will be $1,428, the August 2013 highs. Above there, we could be looking at new all-time highs for gold as $1,920.70 the 2011 peak will stand as the ultimate level of resistance.
Gold spiked lower to just over $1,210 on the December futures contract on July 10. That move shook many longs out of the market. The precious metal reversed and has been making great strides on the upside since then. As gold now approaches its critical resistance which is somewhere around the $1,300 per ounce level, the moment of truth for the yellow metal is fast approaching. If the dollar index breaks 91.88 on the downside, we could see a fast and furious move in gold as all of those who scrambled out of the market in late June and early July throw caution to the wind and pile back into a market that looks technically ready to surprise on the upside. Friday’s job report dampened last week’s gold rally as the dollar bounced away from critical support. However, the trend in the dollar remains lower and that is supportive for the price of the yellow metal.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.