Gold’s Breakout Represents a Potentially Massive Macro Shift

Gold Talking Points:

• After a rough six-month outing gold prices rallied in a very big way over the past week.
• With a weekly gain over 7% as of this writing, it’s the largest such move since January, just before the metal had topped-out, begging the question as to whether buyers are in control and, if so, might that shift have carryover to other markets such as stocks or Treasuries.

After coming into the year with a full head of steam, gold spent much of the past six months in varying forms of distress. But, along the way, it built a falling wedge pattern – which is often approached with the aim of bullish reversals. And over the past week, that is what has so far shown up, as buyers took a step forward in a big way, and prices are re-testing a prior point of resistance that had previously held the highs back in October of last year.

Gold Weekly Chart – The Breakout

Chart prepared by James Stanley; data derived from Tradingview

What’s Behind the Drive?

I looked at this in the five charts for the week ahead video for StoneX, and I’ve linked that below, but my opinion is that gold is looking or trying to look around the next corner. And after Kevin Warsh seemed to talk a big game on being hawkish at last week’s FOMC meeting without any actual follow-through, gold markets are moving on the basis of a less-hawkish Fed. Now, this doesn’t mean that there won’t be fracture, as we saw at last month’s vote with three dissents actually looking for a hike. And since then, we’ve heard from other Fed members like Paulson or Cook that sounds as though they could also be in that dissent camp voting for a hike before too long.

But, from where we’re at now, it looks as though that inflationary pressure may not be as strong as it was a month or two ago, and this puts perhaps even more pressure on the CPI report for next week.

Gold Leads the Top 5 Charts for Next Week

Gold Structure

At this point the daily chart shows the theme quite cleanly, as the sell-off of lower-lows and lower-highs ran into consolidation through the month of July. Notably – the metal had held above $4k until just after the June FOMC meeting when the bank sounded hawkish and that’s ultimately what brought the test of the big figure in.

But, perhaps more important is what didn’t happen after that, as buyers disallowed for breakdowns and price merely paused at that level while consolidating with lower-highs and higher-lows.

It’s the last part of that statement that is most important, as this signified a change-of-pace, which also showed on the weekly chart with the past two weeks showing as higher-lows. And then after this week’s open, bulls wouldn’t even allow for a $4k re-test, as support played at the familiar level of $4023 before the breakout ramped up in a big way.

Also notable from the daily chart is how those prior lower-highs during the consolidation phase now set up as possible higher-lows for the bullish trend scenario.

Gold Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

Gold Near-Term Strategy

The below four-hour chart is the one that I had shared in the above video, and given how strong the bullish move priced-in, there’s a few different scenarios worth entertaining.

Ideally, bullish momentum would remain so aggressive that pullbacks are mild or moderate, but given the intensity of the CPI release next week, the realm of possible setups should be widened. For nearby supports, both $4300 and $4250 stand out, as does the $4200-$4220 zone.

But, should profit taking drive a deeper pullback, support from around $4160-$4180 could be workable, as could the $4100-$4116 zone.

If buyers fail to hold the move for an almost $300 pullback, it’ll start to look like bulls had failed to take advantage of that rally.

Gold Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

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