Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How Far Can Gold Price Go?

Commodities / Gold and Silver 2016 Feb 10, 2016 - 10:48 AM GMT

By: Bob_Kirtley

Commodities

Gold has broken higher through its long term downtrend line with the most recent rally. This break begs the question of how much longer gold can continue rallying. In this article we analyse the technical situation for gold to determine at what level gold is likely to cease rallying, the fundamentals in play, and what would have to change to cause a new bull market in gold.


The Technical Limits for Gold

The peak in gold prices came in 2011 and trended lower after this, but the technical gold bull market did not break until April 2013. Since this break and the beginning of the bear market gold has had upward resistance from a downtrend line that has held steady despite a number of rallies in gold. However, gold has now moved above this resistance and, more importantly, closed above it.

Now that this level is broken the next major resistance is at $1275, then close to $1400 with the downtrend line that has been in place since the all-time highs were made in 2011. The question is, can gold challenge these levels?


The above graph shows every bounce that gold has made since it peaked and the magnitude of each bounce. The largest of the bounces saw the yellow metal rally 18.06% and gold is currently up 13.28% from the lows made last year. This means that if gold moves above $1250, then we will be in the strongest period for gold prices since 2011.

The Cause of the Current Bounce

For gold to sustain its strength and continue rallying above $1250 there will have to be a significant shift in the fundamental situation.  The current movement can be accounted for by the removal of a key bearish catalyst: The Fed hiking.

Fears around China’s currency devaluation and a lack of inflationary pressures has caused a risk off tone in markets. While these volatile conditions persist the Fed will not hike rates, and will instead take a dovish stance as they did at their January Meeting. As a result market pricing for a single rate hike by the end of year has fallen to only 21%. This is in stark contrast to the situation following the rate increase in December, when the markets had priced in between two and three hikes and the Fed predicted at least four hikes would be required.

Without the bearish catalyst of a new hiking cycle to drive gold prices lower the metal has recovered considerably. However, the removal of the bearish catalyst does not mean that a bullish catalyst is now in place. Gold could simply trade sideways until economic and market conditions allow the Fed to hike again. Accordingly, for gold to rally above $1250 there would have to be a new, heavily bullish factor would have to come into play.

Dovish Policy is the Only Long Term Bullish Catalyst

Any event that causes safe haven buying, such as increased geopolitical threats, are likely to drive gold higher. However, these rallies are generally reversed once the risks decreased and those who bought gold as a safe haven asset exit their position. This means that although safe haven buying has the potential to drive gold higher, it will not be a catalyst for a new bull market.

We believe the only factor that can drive a sustainable bull market in gold is more dovish monetary policy from the Fed. The strong inverse relationship between gold and real rates implies that any major dovish action would drive gold higher. This includes targeted quantitative easing measures, such as QE3 and the programs currently being used by the ECB. Although these types of programs have not been bullish for gold, any measures that would drive US interest rates lower would fuel a bull market due to the strong inverse relationship.

Therefore, although gold prices are currently rallying hard, we believe that their momentum is unlikely to be sustained as there is no bullish catalyst to ensure that prices rise over the longer term.

How Far Can Gold Rally?

Gold is limited technically by its past performance and specifically by its bounces since the peak, which implies a technical limit around $1250. Before then gold will have to push through resistance at $1225 and overcome any profit taking triggered by the RSI showing the metal to be considerably overbought.

To overcome those technical limits the fundamental situation would have to change. This means the introduction of a new bullish catalyst for gold, such as new easing or rate cuts from the Fed. Although the conditions in the financial markets and the inflationary outlook are bleak, the Fed does not have a reason to ease policy at this point. Clearly they have reason to not tighten, but we are not yet at a point where new easing is needed.

Even if the situation continues to worsen from here and a rate hike becomes entirely priced out for 2016, this does not mean the Fed would start new easing. It is likely that the economic situation would have to severely weaken to see this take place. Given recent economic data, such as the employment report last Friday that showed wage inflation rising, we believe that it is unlikely that the Fed will need to ease policy.

Therefore, we believe the limit for gold is $1250. This means that aggressive long positions on the yellow metal currently hold poor risk reward dynamics. Rather, we are targeting topside protection trades and conservatively bullish trades on the metal. With gold highly unlikely to break $1250, but also unlikely to fall significantly, it makes sense to take on these types of trades. If you wish to receive the trading signals with the details these trades, visit www.skoptionstrading.com to become a subscriber before we close our doors on February 20th.

Sam Kirtley

Email:bob@gold-prices.biz

URL: www.silver-prices.net
URL: www.skoptionstrading.com

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

Disclaimer:  www.gold-prices.biz   makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is neither a guide nor guarantee of future success.

Sam Kirtley Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in