Gold markets rallied quite nicely on Monday to reach towards the 200-day EMA. That being said, the market is facing a significant amount of resistance just above, so do think that it is only a matter of time before we see selling pressure. There is a major downtrend line and the $1800 level. The $1800 level is a large, round, psychologically significant figure, so one would think that a certain amount of attention will be paid to it. The market breaking above there then has to deal with all of that noise between $1800 and $1810 above.
If we can finally break out above $1825, then it is possible that we may have the possibility of a move towards the $1835 level, an area where we have seen massive amounts of selling pressure and resistance for some time. Any breach of that would open up the possibility of a “buy-and-hold” scenario, which is something that I do believe that we will eventually get, but we may be talking months down the road. When you look at this chart, you can see clearly there is a major downtrend line that has been reliable, but at this point you should also focus on the candlestick from the Friday session, because if we can break down below it then gold will almost certainly fall rather hard.
Keep in mind that the US dollar has a strong negative correlation to the gold market, especially when you look at it through the prism of interest rates coming out of the 10-year note. The 10-year rates rising works against the value of gold typically, as the average hedge fund is going to want to hold onto paper instead of paying for storage fees for massive amounts of metal. If you can get a return on a bond, it is much more attractive than something that you have to store. That being said, if we do see the US dollar fall apart, that could eventually lift gold, but it does tend to be an underperformer in that scenario, despite what you may have been taught. (The back testing simply does not suggest anything else.) This is a market that tends to chop back and forth and I think we will see more of that over the next few days.
