I believe gold prices will move higher over the long term, but there are some warning signs in this market that I can’t ignore. The most notable one is the outside bar reversal on the weekly charts at the beginning of September. I also get the feeling that the general worry barometer has dropped in recent weeks and that can be seen in the declining volatility index – VIX.
The Caution Signs for Gold
A bull market in gold needs to be constantly fed. Gold prices have been strong this year and there are plenty of reasons for it to move higher. However, I just don’t like the price action in the month of September. Every bull market needs to retrace and take a breather and gold is no stranger to that philosophy. I believe gold is a bit tired at this point and is in jeopardy of giving back some gains.
The reversal on the weekly charts is a major concern for me. Sometimes judgement can get clouded when you want a market to move higher, but the charts are waving a red flag. It is true that the market is in a solid uptrend and should get the benefit of the doubt, but I am still cautious for now. This negative pattern could obviously be taken out if the market has a strong breakout to new highs, but I will have to wait for that to be proven.
The gold market hasn’t been snapping back as quickly as it was in previous months and overall weakness is apparent. The stock market has been moving higher even with the recent event between Saudi Arabia and Iran. Trade talks with China seem to be going better, but I still feel it is going to be a long and difficult process to get a favorable trade deal with China. An overall cooling of these tensions has factored into some weakness for gold, but they are certainly not resolved issues.
The daily charts paint another cautious picture for gold. The market could be developing a head and shoulders top. It hasn’t confirmed with a breakout to the downside, but it could be potentially negative for the market. I would also view the daily chart as negative if we see another week or two of sideways to lower prices. That could lead to a rollover, possibly causing a quicker and steeper decline in prices.
Bear in mind that these are signs or signals on a chart. Strong bull and bear markets often prove counter-trend signals wrong. I wouldn’t get short the gold market at this point but I would be cautious with long positions. Positions can be hedged in a number of ways to reduce risk and still profit from upside moves in gold. I wrote in a previous article about doing a silver/gold spread for traders who feel gold will move to record highs.
Is the Big Picture for Higher Gold Prices Still Intact?
I believe it is. Central banks are buying gold reserves at a record pace and there is a good reason for it. Many European countries are buying gold to diversify their currency reserves. The trend is toward zero or negative interest rates. This could be a difficult cycle to break, as the world is swimming in debt and low/negative interest rates don’t appear to be helping many countries. But it does lower their debt payments!
Something has to give with this strange new economic world we live in. The US and other central banks around the world flooded the system with liquidity during and after the financial crisis of 2008. Gold prices rallied sharply during the early part of that cycle, peaking in 2011. It now looks like we are in the second cycle and this time could have the same or greater effect for gold.
Central bank buying of gold doesn’t necessarily mean prices are going higher. There was a sharp increase of net buying from central banks in 2011 and the next couple years. Gold prices peaked in 2011. There was a decline in purchases in 2016-2017. That is when gold prices bottomed and began moving higher. I believe central bank buying is an overall positive, but the underlying economic reasons this time around are more positive for gold prices.
Gold Trading Outlook
I like the gold market long term, but the short term looks like a deeper pullback could be in order. The market needs to prove itself and take out the highs in early September before I would probably change my opinion.
I like buying pullbacks in trending markets. The problem here is the risk is too high in my opinion to go against these negative setups on the charts. The market reaction to the news and fundamentals also makes me pause. There are probably some traders calling for a top in gold and have established short positions. I would expect a good deal of short covering if gold can break through the previous highs. Broken technical patterns can be good entry signals by themselves, as many traders scramble to cover positions and new traders jump in with buy orders. I would rather hedge a gold position at this point or wait for the market to prove itself. A deeper correction could also present a better opportunity to buy.
