Gold bull flagging

Following the burst of momentum in the summer months, gold has endured a rather ugly – if still volatile – couple of months in September and October.

Following the burst of momentum in the summer months, gold has endured a rather ugly – if still volatile – couple of months in September and October. In part, the recent struggles can be explained away by increased optimism that the US-China trade situation and Brexit stalemate could soon be over, reducing safe-haven demand. In addition, you have profit-taking from overbought levels also applying a bit of downward pressure. All told however, with central banks still in easing mode and geopolitical risks remaining elevated, the long-term outlook remains positive for the commodity.

Indeed, even if the US-China were to end their trade war, this won’t necessarily be a bad thing, as the prospects of raised physical demand from one of, if not the, largest gold consumer nations may keep prices support. In fact, investor interest in gold has already been rising steadily over the past few months. According to the World Gold Council, global gold-backed ETFs and similar products had $3.9bn of net inflows across all regions in September. This meant, collective gold holdings increased to 2,808 tonnes, the highest of all time, thus surpassing the late 2012 levels, when gold was trading near $1,700. If ETF holdings are anything to go by, then gold could rise at least another $200 from current levels. But obviously it is not as simple as that, as the other variables impacting prices now are different to those in 2012.

From a technical point of view, gold’s sharp gains in the middle of this year undoubtedly caused prices to become overbought. But now we are seeing the longer-term momentum oscillators such as the Relative Strength Index (RSI) on the weekly chart slowly work off their overbought conditions, crucially through time rather than price action. This is a good sign as it indicates gold is holding near the highs without giving back much. With the RSI no longer being overbought on the weekly time frame, the long-term uptrend could soon resume. The precious metal is currently stuck inside a bull flag pattern. It is likely that we will see fresh technical momentum buying should prices beak out of this bullish continuation pattern in the coming days or weeks. But before the breakout can potentially occur, we can’t rule out the prospects of further short-term pain for the bulls. The point of breakout is around $1510-20. So, while it remains below here, we are neutral. If and when gold breaks above here, then we will turn bullish.

Indeed, the long-term momentum has been bullish for gold. Although the metal fell in September, it is currently holding in the positive territory so far this month. Prior to September’s drop, gold had:

  • rallied for 4 consecutive months,
  • risen for 8 out of the past 12 months,
  • broken out of a 6-year old consolidation, and
  • taken out numerous resistance levels and moving averages.

So, due to the above reasons, we favour looking for bullish rather than bearish price patterns to emerge going forward. That said, the bulls must show up and soon, before we reinstate our bullish view.

Source: eSignal and City Index.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.