The price of gold (GOLD) lost some 3.5 pct in the month of June, and is somehow bearish. Some call for a breakdown of the secular uptrend which started in 2002. Although that may be true we take a deeper look into gold, and try to understand whether we have to revise our Gold Price Forecast For 2018 which went from bearish at the time of writing (three quarters ago) to bullish early 2018. We look at a gold price prediction based on the dominant gold chart pattern as well as the gold futures market structure, and we believe there is a very clear message that is nicely in synch increasing the odds of our gold prediction: gold price will go from bearish in the short term to strongly bullish right after.
From an intermarket perspective it is somehow understandable that gold has been weak in recent weeks primarily because of US Dollar strength. Although this negative correlation between the Dollar and gold is not visible on a day-by-day basis it definitely is there on a longer term timeframe for sure when one or both start trending strongly (up or down).
InvestingHaven‘s research team explained in How The US Dollar May Impact Emerging Markets In 2018 that the most influential market in the world right now is U.S. Treasury Yields. Interestingly, 20-Year Yields are at a make-or-break level. After they turned their 4-decade downtrend into an uptrend recently there is a breakout test at play now. If, and that’s a big IF, rates do not go lower from here, we expect weakness in the Dollar which will drive precious metals higher in the 2nd half of 2018. The opposite is true as well.
It is imperative to choose the right view to assess a market or an asset, in our case gold. The length of the timeframe as well as the type of chart are a key success factor.
Gold price: short term bearish followed by strongly bullish
We prefer to look at gold’s long term chart which shows both the uptrend (until September 5th 2011) as well as the subsequent downtrend (until today included). The reason is that we look for specific patterns within a long term trend. Remember: the clearer the pattern the higher the probability of a forecast.
The most important insight, by far, that stands out on gold’s chart, is the long term cup-and-handle in the context of the ongoing bear market.
How far can the ongoing ‘handle’ bring the price of gold? According to us, and the generic rules of thumb with this setup, gold’s price may fall to the $1200 area (give or take a couple of percentages).
Not only gold’s chart suggests a fall to the $1200 area also the futures market is positioned likewise.
Based on the Commitment of Traders report, short COT report, we see that the downside is limited. How can we know? Look at the positions of the largest market participants (middle pane). The number of long contracts of non-commercials is some 75k (red bars). This is historically low (blue dotted line), and that suggests that the downside is limited. Even if the long positions fall to some 20k which would be the lowest in 9 years (super bearish) it would imply another 6 to 7 procent downside in the price of gold.
Long story short: both the gold price chart pattern as well as the gold futures market structure suggest that the $1200 area will be the lowest point before a strong rally will start. The wildcard to watch is the US Dollar as well as 20-year Yields: if Yields break down, the Dollar may rise strongly, and lead to additional and longer weakness in gold.