The SPDR Gold Trust (GLD) and the gold futures contract closed at a seven-year high on Tuesday, underpinned by the coronavirus outbreak and dovish central bank policies around the world. The contract traded above $1,600 for the first time since 2013 and is setting its sights on the all-time high near $2,000, posted in September 2011. However, a final layer of tough resistance could slow or stall the advance in coming weeks, trapping late-to-the-party gold bugs.
The uptick follows a 2019 breakout above a six-year trendline, so plenty of traders have been taking advantage of the upside in recent months. Traders can also see that this instrument broke down from an 18-month double top pattern in 2013, right at the price level reached in this week's advance. There are good reasons to act defensively at this level, but the yellow metal's resilience since it mounted $1,500 in August 2019 could also presage a successful assault on this barrier.
What could end gold's uptrend, beyond the current technicals? For starters, the coronavirus outbreak appears to be receding, and China is acting quickly to normalize its economy in order to show the world that it is back in business. An uptick in inflation would also dampen buying interest for gold, but that isn't likely after years of modest growth. Even so, the bond market should see that coming from a mile away, telling gold traders to keep one eye on the credit markets at all times.
GLD Long-Term Chart (2004 – 2020)
The gold fund came public in the mid-$40s in November 2004 when the futures contract was trading near $450. It carved a small trading range and took off in a powerful trend advance in 2005, finally topping out in the upper $90s in the first quarter of 2008. A steep slide during the economic collapse found support in the low $70s, ahead of a recovery wave that completed a round trip into the prior high in 2009.
This resistance level aligned perfectly with $1,000 on the futures contract, setting the stage for a historic breakout into the new decade. The rally picked up steam through 2010 and the first half of 2011 before posting an all-time high at $185.85, which corresponded with an equally lofty trip to $1,911.60 on the futures contract. A contraction in China's rapid growth rate ended the rally at that time, while generating multi-year tops all across the commodity universe.
Price action carved a double top pattern, with support between $146 and $150, and broke down into 2013. Keep that price level in mind because the fund is now trading just two points above that barrier. It plunged into the middle of the decade, finally bottoming out at $100.23 in December 2015, while a 2016 recovery rally stalled at the .382 Fibonacci sell-off retracement level after the Brexit vote in June.
GLD Short-Term Outlook
Higher 2016 and 2018 highs filled out a long-term basing pattern, while a long series of lower highs established a shallow trendline that was mounted successfully in the summer of 2019, setting off all sorts of buying signals. It looks like the fund is now engaged in the fifth wave of an Elliott five-wave rally pattern starting at the 2018 low, favoring additional upside before the uptrend runs out of steam.
However, the .618 sell-off retracement is sitting at $153, or about two points above the fund's current price level and slightly above double top support broken seven years ago. While this suggests that a final resistance layer needs to be mounted, the contract resistance line is sitting at $1,601, or about 10 points below this morning's action. This mixed message lowers the odds that the gold rally will sustain these lofty levels in coming weeks.
The Bottom Line
Gold is trading at a seven-year high but is still testing tough resistance around $150 on the fund and $1,600 on the futures contract.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.