Ultimately, this is a market that I think may try to grind higher to fill the gap, but we have other things out there that could come into play and make this a bit of a headache to trade.
The most important thing is the fact that the 10 year yields in America have broken below the 1.30% level, which is a bit surprising, considering that inflation was supposedly going to be the biggest issue we face of the next couple of months. It looks as if the market is almost certainly changing its attitude, and therefore it will cause a lot of volatility in a smaller market like gold. At this point, I think we will probably try to get towards the $1860 level to fill the gap, but as far as breaking above there we may have our work cut out for us.
The US dollar breaking out against multiple currencies could work against gold, so therefore I think if we turn around and take out the lows of the week, we probably go looking towards the $1750 level, possibly even the double bottom at the $1680 level after that. Underneath there, then it is an open door towards the $1500 level, which would obviously be a major capitulation by the market.
It is worth noting that the gap was of course a very negative one, and typically the top of the gap will hold as resistance. It is because of this that if we were to break above there, then I think gold would suddenly become very bullish. However, we need to get some type of resolution in the bond markets as to which way inflation is going. After all, most pundits believe that inflation is going to be extraordinarily high, and we are starting to hear people talk about 70s style inflation well. However, it is obvious that bond traders still believe in this, and therefore they are buying bonds and accepting lower rates. This is one of the situations where we will sooner or later break in one direction or the other, and then the trade will become obvious. I am still skeptical of gold on the whole.
