Gold Bounces From Lows But Are Brighter Days Ahead?

Gold Talking Points:

• Last week started with a descending triangle breakdown and yesterday showed the same. But the response to each has been different and this raises the prospect of change.
• The prior descending triangle saw prices break down and then range with support at the 4100 zone. The more recent item saw a fast snap back, and prices are in the same 4100 zone that was in-play before the move.
• Bigger picture, it’s the $4k level that looms large but ideally for bulls, support would show above that, illustrating a degree of bullish anticipation.

Gold prices have had a rough six-week stretch following the failure at 4700. While the Fed avoiding rate hikes in July and then the Treasury buyback announcement a couple weeks later helped to fuel a rally in gold, the backdrop has been considerably less friendly since, with Treasury yields flying and odds around the FOMC expecting more of a hawkish tilt.

But from the big picture, it’s still not terrible as the moderation earlier in the year simply took some of the fuel out of an overbought market that had spent much of the prior two years in an aggressive rally.

Gold Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

The $4k level was big a year ago as it came in as support over a five week stretch in October, and as the Fed leaned into more cuts the rally took on another life of its own, with prices jumping up to and through the $5k level, eventually topping at just under $5600/oz. This certainly seemed to qualify as a ‘mania’ and the fundamental justification for such made sense given the backdrop.

With the Fed cutting in a second cycle, even with inflation remaining above their 2% target, there was even less attraction in holding reserves in US Dollars. Those rate cuts, combined with still-too-high inflation spelled for dilution of fiat currencies and because fiat currencies can really only be measured against other fiat currencies, this is something that wouldn’t necessarily show up against the Euro or the Yen or the British Pound.

But in an asset with finite supply, measured against something that’s essentially being diluted, that difference shows in a stark manner.

As a case in point, the $2k level was hard resistance for gold for three-and-a-half years, all the way until the Fed walked into a dovish posture in early-2024, eventually driving a breakout that continued to stretch for most of the next two years.

But the change-in-pace showed up earlier this year, in the form of a less controllable variable of higher oil prices, which have an expansive effect on economies as oil is in more than just transportation. This helps to explain the snap back move in gold back in March, followed by the continued drawdown as inflation levels moved higher earlier in the year.

Through much of that, however, the $4k level remained unfettered as buyers continued to show up early. But after Kevin Warsh’s first appearance at the Fed, when he took markets by surprise in sounding far more hawkish than what many expected President Trump’s hand chosen successor as the Chair of the FOMC to sound, and gold finally got down for that $4k re-test.

This took place over a seven-week period, all the way until just after the July FOMC meeting. But, from this, we can see clear evidence of buyers coming in for a perceived value whenever spot gold traded below the massive psychological level.

Gold Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

Gold Sellers Are Still Driving

I talked about capitulation in the Tuesday webinar and another way of considering the topic is a liquidity sweep. When sellers have an open door to push for the breakdown, but, instead, pullback and fail to run with the sell-off, we have what could be the early stages of reversal. This kind of observation is indicative of a heavily oversold market when there’s simply few sellers left on the sidelines and, instead, profit taking after the fresh low leads into the bounce.

Yesterday was one of those scenarios, where bears had even open door to run with the break as another descending triangle had filled in. But they didn’t cease the opportunity and, instead, prices pulled back to a familiar level of $4135.

At this point, an absence of negatives doesn’t necessarily spell a positive – but it could be a novel first step.

What would be required for that scenario at this point would be a press from bulls to establish a higher-high, illustrating an increased willingness from buyers to continue to drive. We don’t have that yet, as that same $4135 level has so far proven resistant. But a higher-low support hold at $4100 – or even if a higher-low shows above yesterday’s swing low of 4066 – could begin setting the table for such.  

The clear zone of resistance overhead runs from 4200-4235 and once that is taken out, there will be a more attractive bullish theme to work with. That’s quite far away, however, so, at this stage, looking for a break and re-test of higher-low support at $4135 could be an attractive early-stage illustration of that scenario.

And from the weekly bar – if it does finish the week in the green – even if it’s just a doji – that capitulation theme gains another item of confidence.

Gold Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro