Gold Completes 5-Year Breakout Pattern

The SPDR Gold Trust (GLD) has lifted quietly to five-year trendline resistance at $130 ($1,380 on the CME Globex futures contract), bucking headwinds from a more hawkish Federal Reserve that is expected to raise interest rates three or four more times before the end of 2018. This bullish price action completes a multi-year basing pattern, with a breakout confirming the first major uptrend since 2011.

A gold breakout is likely to coincide with inflation data rising more quickly than expected, forcing the Fed to play catch-up. That could happen in the dreaded stagflation scenario, in which trade wars slow world economic growth while commodity, industrial and consumer prices rise rapidly due to protectionist and retaliation policies. Gold could also attract aggressive buying pressure if U.S. talks with North Korea fail in May, which is the most likely outcome. (See also: Gold Price Forecast: Correction Dependent on Risk Recovery.)

GLD Long-Term Chart (2004 – 2018)

The SPDR Gold Trust debuted in the mid-$40s beginning in the fourth quarter of 2004, at the same time that gold futures were trading near $450. It entered a powerful uptrend a year later, topping out at $72.26 in May 2006. A shallow pullback into 2007 attracted healthy buying interest, generating a buying surge that stalled in the first quarter of 2008, right at $100 and $1,000 on the futures contract. It fell sharply during the economic collapse, bouncing on top of the 2007 breakout in the upper $60s.

A subsequent recovery wave reached the 2008 high at the end of 2009, ahead of a powerful breakout that also cleared psychological resistance, spawning a momentum-fueled advance that came to a crashing halt in the third quarter of 2011. The fund topped out at an all-time high at $185.85 and sold off to $148.27 while futures posted a historic top at $1,911.60, less than 100 points below $2,000.

A 2013 descending triangle breakdown dropped the fund into a downtrend that ground out a descending channel into December 2015, when GLD bottomed out at $100.23. A bounce into July 2016 stalled at $121.15, with mixed action since that time holding within the boundaries of the seven-month price swing. Meanwhile, major highs since 2013 have drawn a trendline that has been tested unsuccessfully three times, while a fourth test has been under way since September 2017.

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GLD Short-Term Chart (2016 – 2018)

An intermediate downturn followed the rally into July 2016, with the fund posting a higher low after dropping into the .786 Fibonacci rally retracement level.  A slow-motion recovery wave then took control, reaching trendline resistance for the fourth time in September 2017. The narrow range pattern into March 2018 bodes well for gold bugs, with long-term cycles aligning in a bullish convergence that could generate a major breakout in the coming quarter.

On-balance volume (OBV) posted a lower high in 2012 and entered a brutal distribution phase, descending for more than three years before turning higher in early 2016. Subsequent accumulation ended right at pattern resistance generated by the descending triangle, warning of a similar fate when the futures contract finally trades above $1,500. The indicator has now returned to that level and should break out in reaction to a price surge above $1,400.

The breakout level has aligned with the .382 retracement of the long-term downtrend, establishing an upside target above $150 for GLD and $1,500 on the futures contract. That would translate into a rally that reaches major resistance at the descending triangle breakdown at $153. It will take considerable buying power to mount that barrier, suggesting that breakout buyers take aggressive profits as the rally develops. (For more, see: Return of Volatility Triggers Buying Opportunity in Gold.)

The Bottom Line

The SPDR Gold Fund and CME Globex futures have completed five-year basing patterns that could presage the first major uptrend since 2011. (For additional reading, check out: 8 Reasons to Own Gold.) 

<Disclosure: The author held no positions in aforementioned securities at the time of publication.>