Gold Completes 6-Year Basing Pattern

Gold has completed a complex six-year basing pattern and could break out in the coming weeks, posting the strongest gains since the start of the decade. The $1,500 level looks like a natural first target for the advance, reaching the .618 retracement of the multi-year downtrend and the underside of 2013's double top breakdown. More importantly, there's plenty of time to get on board, with the futures contract pulling back from resistance at the start of the new trading week.

A dovish Federal Reserve combined with a tariff-driven economic slowdown could underpin the upside for gold, with higher consumer prices generating the strongest inflation surge in many years. The rally could also restore the yellow metal's long-held reputation as a fear gauge, driven by worldwide discomfort with the biggest supply chain disruption since Ronald Reagan cleared the way for globalization in the 1980s.

Gold Fund Long-Term Chart (2004 – 2019)

Long-term chart showing the performance of SPDR Gold Shares (GLD) 

SPDR Gold Shares (GLD) came public in the mid-$40s in November 2004 when the underlying futures contract was trading at $442. It posted an all-time low at $41.02 in February 2005 and turned higher, topping out at $100 in March 2009. A steep decline during the economic collapse found support in the upper $60s, ahead of a bounce that completed a round trip into the prior high in September 2009.

A powerful breakout into the new decade carved higher highs and higher lows into September 2011's all-time high at $185.85. Ironically, a Chinese slowdown contributed to the subsequent reversal, which triggered a multi-year downtrend throughout the commodity complex. Price action completed a double top pattern into 2013 and broke support at $148, generating a vertical decline that cleaned out the majority of complacent gold bugs.

The downtrend eased into a descending channel in the second half of 2013 and continued to post new lows into the December 2015 low at $100.23. The subsequent bounce stalled at $131.15 in July 2016, establishing a trading range that has held intact for the past three years. Four breakout attempts into February 2019 have carved slightly lower highs, adding to a descending trendline that started in 2013, while a fifth breakout attempt is now underway.

The monthly stochastic oscillator crossed into a sell cycle in March 2019, predicting at least six to nine month of relative weakness, but the fund has continued to post gains in reaction to the Fed's retreat from aggressive fiscal policy despite a booming economy and full employment. Of course, tariffs are the culprit in this bullish divergence, which could trigger major buying signals in the coming weeks.

Gold Fund Short-Term Chart (2017 – 2019)

Short-term chart showing the performance of SPDR Gold Shares (GLD)

The on-balance volume (OBV) accumulation-distribution indicator entered a brutal distribution phase after topping out in 2011, with intense selling pressure finally coming to an end in December 2016. OBV has posted a series of nominal new highs since that time and has now reached the highest high since January 2013, three months before the double top breakdown. This bodes well for a buying surge up to $150, perhaps as early as August or September.

The fund has posted two higher lows since 2015, building support above $110, while lower highs have completed the outline of a symmetrical triangle pattern. A rally above the January high at $130 would trigger a breakout above triangle and trendline resistance, opening the door to an important test at the bottom of 2013's broken double top. While that might slow or stall progress, the measured move target following a breakout lies closer to $160.

The Bottom Line

Gold has completed a multi-year breakout pattern and could rally above $1,500 ($150 on the gold fund) in the coming months.

Disclosure: The author held no positions in aforementioned securities or their derivatives at the time of publication.

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