Cost of gold

The cost of gold has dropped quite a bit since the metal reversed in April at the 2016 resistance. The price fell over 125 points to the lowest its been since December of last year. The Federal Reserve acted aggressively on the interest rates which has driven the decline. A looming trade war reinforces bearish sentiment. Fortunately for the bulls, it’s fallen too far too quickly and now sits at a support level that could offer long-side trading profits through this summer.

Because the decline incurred technical damage that has the potential to mark an eventual top and downtrend, this is a trading call and not a buying recommendation. Now, it takes a rally above the first quarter high to ease that headwind that seems unlikely with the Fed’s ambitious rate hike schedule. A trade war, however, could mess with inflationary fire and trigger supply disruptions and lift commodity prices to the highest it’s been this century. If this is the case, it’s possible gold could break out in the next few years, heading towards $2,000 an ounce.

The SPDR Gold Trust came public around $45 in 2004 with the underlying commodity trading just above $450 being sold off to $41.05 in the first part of 2005. This drop made the lowest amount in the past 13 years. In the third quarter, it turned higher and entered a strong uptrend which stalled in the lower $70s in 2006. In October of 2007, the fund cleared that level just as the equity bull market ended. The ending of the bull market lifted to resistance in March 2008 at $100.

Falling more than 30% during the bear market, gold came to rest in the upper $60s while the bounce reached the previous high in the start of 2009. A consolidation of seven months completed a historical breakout in the triple digits on the fund and quadruple digits on the underlying commodity. The rally continued into the third quarter of 2011 and topped out at an all-time high near $186 and $1,905. The metal made a descending triangle top into April of 2013 and broke down. The gold then entered a brutal decline which bottomed out in 2009 at breakout support in the fourth quarter of 2015.

The fund had support at the 50% range retracement level in December of last year, finished a round trip into the high of September and reversed. These feats completed a 100% retracement into the previous low earlier that week. Then, they established a rectangular pattern which forecasts a bounce to resistance at the intersection between the range breakdown the first of May, unfilled May 15 gap, as well as tightly aligned 50- and 200-day EMAs. Dip buyers at support, in turn, could profit from a bounce reaching $122 to $125 before the next major reversal hits. A tight stop loss is necessary to manage risk in this case, placed under December and July lows.