Gold Chartbook: Seasonality Favors Another Wave Up

Feb. 04, 2022 10:37 PM ETGold Spot Price (XAUUSD:CUR)GLD, IAU, PHYS, PHYS:CA8 Comments4 Likes
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Florian Grummes
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Summary

  • Gold prices had recovered US$100 or 5.79% from the December lows within just six weeks.
  • However, in the aftermath of last week’s FOMC meeting, gold sold off hard down to US$1,780, wiping out nearly all those gains since mid of December.
  • At the same time, last week likely triggered a top in the US-Dollar and a violent back and forth bottoming pattern in the stock market.
  • This, together with gold's favorable seasonality until end of February, should create another wave up for the precious metals sector in the short term.

American gold coin treasure hoard of the rare USA double eagle 20 dollar bullion currency

TonyBaggett/iStock via Getty Images

In our gold chart-book from January 20th, 2022, we assumed that gold should have some more upside potential given the favorable seasonality until the end of February. So far, gold indeed managed to climb higher and reached a 2-month high on January 24th at US$1,853. At that point, gold prices had recovered US$100 or 5.79% from the December lows within just six weeks.

However, these gains attracted some profit-taking at prices around US$1,850. And in the aftermath of last week’s FOMC meeting, gold sold off for three days in a row. This merciless sell-off only ended at US$1,780, wiping out nearly all gains since mid of December. It was some form of the classic “the bull walks up the stairs and the bear jumps out the window” pattern, which is a typical behavior within an uptrend.

Hence, and exactly for this reason, the deep pullback did not necessarily end the recovery in the gold market. Of course, in the bigger picture, the entire precious metals sector is still stuck in this tenacious correction which has been ongoing since August 2020. In the short term, however, the pullback has created an oversold setup and once again proved that there is buying interest at prices below US$1,800.

US-Dollar index, daily chart as of February 3rd, 2022. False breakout?

US-Dollar index, daily chart as of February 3rd, 2022.

US-Dollar index, daily chart as of February 3rd, 2022. (Midas Touch Consulting & Reyna Gold)

It also seems that the US-Dollar might have hit an important top last Thursday and is now moving lower, which would be very supportive for gold, of course. Everyone is expecting the US-Dollar to go up as the Fed is expected to raise interest rates. But the US-Dollar has been discounting this “hike and taper scenario” for several months already. Actually, the US-Dollar index has been rallying +8.8% since May 2021! During the recent FOMC meeting, however, big money might have used the seeming breakout to sell their dollar longs into a favorable high volume setup. At the same time, stock market sentiment was extremely bearish. Hence, last week likely triggered a top in the US-Dollar and a violent back and forth bottoming pattern for the stock-market.

US-Dollar index, monthly chart as of February 3rd, 2022. A series of lower highs!

US-Dollar index, monthly chart as of February 3rd, 2022.

US-Dollar index, monthly chart as of February 3rd, 2022. (Midas Touch Consulting & Reyna Gold)

In the big picture, a top in the US-Dollar would continue the series of lower highs for the dollar. As well, the US-Dollar has been moving within a huge triangle since 2001. After a series of three lower highs since December 2016, a test of the lower boundary of the triangle would give Gold (XAUUSD:CUR), as well as the SPDR Gold Trust ETF (GLD), the iShares Gold Trust ETF (IAU), and the Sprott Physical Gold Trust (PHYS) prices an extreme tailwind in the coming years. Hence, even if it's hard to come up with any bearish arguments for the dollar at the moment, technically it looks like the dollar could roll over.

Gold in US-Dollar, a daily chart from February 3rd, 2020. Gold’s behavior is changing.

Gold in US-Dollar, daily chart as of February 3rd, 2022.

Gold in US-Dollar, daily chart as of February 3rd, 2022. (Midas Touch Consulting & Reyna Gold)

For gold, a weaker US-Dollar would be very helpful. In fact, since the beginning of this week, we perceive an ongoing change in gold’s behavior. We are getting impressed by its intraday strength! Every small pullback around and below US$1,800 was rather quickly bought again. So far, gold has only recovered 38.2% of last week’s nasty sell-off and currently sits pretty much exactly at its 200-day moving average (US$1,805).

But the fresh buy signal from the slow stochastic oscillator on the daily chart promises more upside. Hence, we see gold fuming its way higher in the coming weeks. In the next step, gold will have to overcome the 38.2% resistance around US$1,808.50 and then continue its recovery towards US$1,830. In any case, the seasonal component is at least very favorable until the end of February. Therefore, even higher price targets are conceivable too. But gold needs to break out above the triangle and clear US$1,850. Only then a more sustainable bullish momentum would emerge which could last further into spring.

If, on the other hand, gold takes out US$1,780, the recovery since mid-December might be over already and the medium-term correction might likely pick up again.

Conclusion: Seasonality favors another wave up

Overall, we assume that seasonality favors another wave up in the gold market. Thus, another rally towards at least US$1,830 is realistic. We are short-term bullish, mid-term neutral to the sceptic, and long-term very bullish for gold.

This article was written by

Florian Grummes profile picture
4.42K Followers
Florian Grummes is an independent financial analyst, advisor, consultant, trader & investor as well as an international speaker with more than 25 years of experience in financial markets. Via Midas Touch Consulting he is publishing weekly gold, silver, bitcoin & cryptocurrency analysis for his numerous international readers. Florian is well known for combining technical, fundamental and sentiment analysis into one often accurate conclusion about the markets. www.midastouch-consulting.com
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Disclosure: I/we have a beneficial long position in the shares of XAUUSD:CUR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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