Gold markets rallied initially to break above the $1800 level but gave back the gains and now looks absolutely anemic after Jerome Powell suggested during his congressional testimony on Tuesday that “transitory” is not a word he would use to describe inflation anymore. Because of this, rates have shot straight up in the air and that works against the value of gold as it is cheaper to hold bonds then it is pay for physical storage of gold.
The size of the candlestick is rather impressive, but it is an extraordinarily negative candlestick. If we were to break down below the bottom of it, I think the gold market is probably going to be in somewhat serious trouble. I think at that point in time the market will probably go looking towards the $1750 level, followed by the $1725 level. On the other hand, if we were to turn around and break above the highs of the trading session on Tuesday, that would be an extraordinarily bullish sign as it would show yet another attempt to break out. I would draw your attention to the fact that we have formed a couple of inverted hammers over the last three trading sessions, so breaking through all of that would be about as strong of a signal as I think you could have.
On a breakout to the upside, we could go looking towards $1850 level, possibly allowing the market to go to the $1875 level. Inflation is most certainly an issue at the moment, but the reality is that gold is not necessarily a hedge against inflation like it was in the 1970s. A lot of it will come down to whether or not interest rates follow to offer some type of real rate of return, as holding onto paper is much cheaper than paying for storage of gold. You should probably pay close attention to the US dollar and whether or not it starts to strengthen again. If it does, that in and of itself could cause some issues for gold. The candlestick for the day is very ugly, and I still believe that we probably have more likelihood of a move lower than higher, but I am simply going to let the market break on one side or another of the candlestick before I put money to work.
