SPDR Gold Trust Shares (GLD) and the futures contract have turned lower, dropping to weekly lows in reaction to the rising odds of a rate hike at the Federal Reserve's meeting on March 14. This follows bearish action in the Vaneck Vectors Gold Miners ETF (GDX), which broke ranks in early February, selling off while the yellow metal probed 3-month highs. Taken together, gold bugs need to watch key technical levels because breakdowns will signal the end of the three-month bounce.

The Federal Reserve tightens interest rates to fight inflation, while investors buy gold to hedge against inflation. As a result, rising rates often coincide with lower gold prices. However, this inverse correlation doesn’t unfold as expected when fear and other emotions drive pricing, as it does during adverse macro events like the September 11th attacks and the 2011 Japanese earthquake. As a result, a Fed tightening cycle doesn’t automatically trigger gold sell signals.

GLD Weekly Chart (2006-2017)

GLD

A multi-year uptrend topped out at $100 in March 2008, giving way to a steep decline that found support in the upper-60s at the start of 2009. That marked the starting point for a historic rally that continued into the 2011 all-time high at $185.85, reached at the same time the underlying contract tested $2000. A pullback off that level into 2012 got bought, generating a lower high, followed by an April 2013 double top breakdown that found support in July at $115.

It bounced for two months and eased into a broad descending channel that continued into a 6-year low at the end of 2015 when the commodity found support just above $1000. Committed buyers returned in force at the start of 2016, posting the strongest recovery wave since the downtrend began. The rally mounted the 200-week EMA at $121 in June, tested new support for four months and broke down, selling off to a 10-month low in December.

The most recent uptick has stalled at the underside of the broken moving average while the weekly Stochastics oscillator has lifted into the overbought level for the first time since July. Price action is now on track to post a weekly cloud cover reversal, but bulls will retain the advantage as long as the fund holds above the 50-day EMA, now rising near $116. A breakdown through that level will open the door to a test at the December low.

More importantly, the fund has failed to end the string of lower highs and lower lows in place since 2011. This tells us the long downtrend remains fully intact, raising odds it will eventually break down through the 2015 low and head into another round of multiyear lows. A Fibonacci grid stretched across the last nine years of price action localizes a potential downside target at the .786 retracement in the low-90s. The blue declining lows trendline adds reliability to this prediction, dropping toward the same level.

What will it take to reverse the long-term outlook in favor of gold bulls? For starters, the fund needs to complete a 100% retracement into the prior swing high. Price action came within a stone’s throw of that achievement in July 2016 when the rally stalled just six points below the August 2013 high at $137.55. Instead, the upside ended at the .786 retracement of the selling wave that started at that high, telling us long-term bears are still controlling the fate of this popular instrument.

The Bottom Line

The gold fund has stalled at the underside of 200-week EMA resistance after a 2016 recovery wave failed to build support above that critical level. This price action opens the door to a test at intermediate support between $116 and $118, with a breakdown setting the stage for much lower prices.

<Disclosure: the author held no positions in aforementioned stocks or futures contracts at the time of publication.>

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