Gold Headed Into Historic Test at 2011 High

The rally in gold futures is closing in on a historic test at 2011's all-time high at $1,912. The relentless advance since March highlights structural instability as a result of dovish central bank policies and loan guarantees that now threaten to drop U.S. interest rates below 0%. That could be catastrophic for Main Street Americans, forcing customers to pay for the luxury of holding cash in banking, brokerage, and savings accounts.

Buying interest in the yellow metal has also been fear driven, with the COVID-19 pandemic increasing worldwide political tensions while threatening to drop first and third world economies into deep recessions. The relentless Nasdaq 100 rally seems out of place in this dangerous equation, especially with credit card companies reporting that consumer activity has stalled once again after a wave of second quarter reopening activity.

It probably isn't wise to expect an immediate gold breakout above $2,000 because all-time highs, especially those posted years ago, mark major resistance levels that can easily repel initial rally attempts. You can see this mechanic play out in the classic cup and handle pattern, in which price action fails a first breakout attempt and eases into a narrow trading range, carving a relatively shallow handle that eventually supports higher prices.

The 50-month exponential moving average (EMA) has lifted above $1,400 on the futures contract, or about 400 points below the current price. This marks the widest divergence between these measurements since 2012, also lowering the odds for an immediate breakout. Watch this relationship closely if gold reverses at resistance because it could identify a support level that offers a low-risk buying opportunity, even if it comes one or two years from now.

Gold Trust Long-Term Chart (2012 – 2020)

Long-term chart showing the share price performance of the SPDR Gold Trust (GLD)

The SPDR Gold Trust (GLD) topped out at $185.85 in the third quarter of 2011 and eased into a descending triangle, with support just below $150. It broke down in 2013, initiating a steep downtrend that continued into December 2015, when the fund bottomed out just 23 cents above $100. Higher lows in 2016, 2018, and 2019 marked support through the second half of the decade, while a string of lower highs starting in 2013 carved a descending trendline.

A June 2019 trendline breakout attracted little media attention, making rapid progress that stalled just below the 2013 triangle breakdown in September. Committed buyers returned at the start of 2020, lifting the fund to $159 in February, when the pandemic started to blow up in the United States. Extremely volatile price action then kicked into gear, completing a V-shaped recovery pattern after a 33-point March downdraft.

Gold Trust Short-Term Chart (2019 – 2020)

Short-term chart showing the share price performance of the SPDR Gold Trust (GLD)

An April breakout stalled quickly at $165, with Wall Street trying to sound the all-clear signal for trend-following equities crushed in the first quarter decline. Price action carved a rectangular consolidation pattern into June, breaking out once again when the outbreak surged in Southern and Southwestern cases. The rally continues to post new highs, with many investors worried that world markets are headed into a slow-motion train wreck.

Buying power has been solid as a rock since the middle of 2018, with the on-balance volume (OBV) accumulation-distribution indicator returning to the 2011 peak (red line) in February 2020 and breaking out to an all-time high. OBV has continued to post higher highs for the past five months, highlighting intense interest that could eventually support a historic breakout. Meanwhile, the rally has just crossed the .786 Fibonacci selloff retracement level, indicating that the "coast is clear" for continued upside into the 2011's all-time high.

The Bottom Line

The gold rally has picked up steam in the past month, setting up a historic test at 2011's all-time high above $1,900.

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

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