What Says The Gold Chart?

Summary

• Market fundamentals are mostly bullish.
• Short-term technical setup is also bullish.
• In the longer term, gold prices should move higher.

Gold becomes more and more popular investment. There seem to be great difficulties in finding another asset, which can capture such a big attention. The dynamics of gold is closely watched by investors from all over the world, and no wonder the main gold market events are thoroughly analyzed. This research is usually fundamental. The reality with a significant fundamental bias leaves a wonderful opportunity to focus on the technical analysis.

It is hard to deny the fact that we need to know the current fundamental background of the market, and that is why I will outline the primary fundamental background first. The second part of the article is entirely devoted to the technical market study.

Fundamental background

Stress and instability are the primary gold drivers. We live in challenging times of growing political and financial risks, which means the demand for gold (and other safe-haven assets) will certainly rise.

Firstly, we should emphasize the importance of rising concerns about the market future. “The most hated bull market in history” has been providing a very good support for the gold prices since 2015. Indeed, gold and stocks move in the same direction. It is not just a coincidence because the large speculators are gradually adding gold to their portfolios. The market is soaring (however, the volume is declining) that is why it is a smart decision to add a liquid safe-haven asset to a portfolio. In order to complete the full picture, positive gold dynamics has also been supported by weakening US dollar.

Secondly, the top central banks have added fuel to the fire. The reverse of the stimulus packages (asset purchase programs) by the major central banks (ECB, the Fed) creates a climate of uncertainty, and it also helps to establish a bullish bias on the gold chart.

Thirdly, this fundamental background would not be complete without geopolitics. Since 2016, we have witnessed many important (and sometimes controversial) political events. Considering all these events, it looks like the politicians have gone long in gold. They are doing everything they can to increase the demand for safe-haven assets.

To sum it up, the broad trend is certainly up.

Technical view

Usually, together with the chart of the main asset, I prefer to analyze the second chart with the positively correlated asset. For instance, if the analysis of the primary chart is telling strong buy and we see the same picture (or at least not bearish) on the second chart, the analysis is confirmed. That is the way I achieve a certain degree of validity.

According to the data, the second chart for the current analysis will be AUD/USD. Indeed, the AUD/USD pair mirrors the primary trends in gold, and it will be a good confirmation.

What tells us the gold chart? The primary task is to identify the main trend. Although the bias is bullish (MAs are sloping upward), the current trend (since early September) is bearish. The powerful support level is located near the 1260-1280 USD range. The 200-day moving average (the reading is 1260 USD) creates a hefty support level, and it is tough to break.

Near the strong support or resistance levels oscillators (in our case the oscillators are MACD and RSI) usually form divergences. Indeed, we see the bullish divergences on RSI and MACD (red lines on the chart below). Divergence is one of the most powerful signals in technical analysis. It usually indicates a weakness in the current market move, and it means there is a high probability of the bullish rebound (the first price target is 1300 USD).

Source: stockcharts.com

In order to confirm the bullish idea, now we need to focus on the AUD/USD chart (below). Indeed, the divergences also appear on the chart. Although the price broke below the 200-day moving average, we see a bullish hammer. This candlestick pattern appears when there is uncertainty in the bearish trend continuation. The bullish hammer together with the divergences confirms the bullish idea on the gold chart. Moreover, the dynamics of RSI on AUD/USD almost completely reflects the RSI dynamics on gold.

Source: stockcharts.com

The bottom line

Fundamentally, as the market uncertainty and global risks become a part of everyday market reality, the bullish expectations for the gold prices will rise. The large speculators already started to add gold to their portfolios, and it is just the beginning of that trend.

I would like to emphasize that the geopolitics and monetary policy decisions are the primary reasons of the bullish bias. These two big drivers are here to stay, and they will provide excellent support for the gold prices. Moreover, an upcoming market correction (see my previous article) will also contribute to the gold price dynamics.

The short-term technical setup is more bullish than bearish. However, the continuation of the primary bullish trend remains an open question, but, bearing in mind the fact that fundamentals are bullish, this question is not a matter of “if”, but “when”.

Speaking about the long-term gold performance, it will depend not only on the fundamentals (as said above, they seem to be quite bullish for gold) but also on the US dollar. The dollar index dynamics shows a classic inverse head and shoulders pattern. It could be a bearish factor for gold, because the strong dollar downtrend (since the beginning of the year) may finally be over.

Analyst’s 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.