Gold has taken a tumble this week and has fallen more than I thought it would by dropping roughly $175 points in the past two days. As you can see from this chart it has now fallen to its two-third’s retracement level, meaning it has taken back two-third of its gains from its March double bottom and recent high. These retracement levels typically act as support levels.
One thing to note is that the price of gold actually got overbought when it’s RSI indicator got to 80. So, some sort of consolidation or pullback was pretty much inevitable after that.
Now the RSI is heading towards an oversold level and so are the daily stochastics for gold too.
We got to be on watch now for a bottom in gold. I can’t predict the exact price low before it comes, but we have to keep our eyes for a turning point here, as it will finally bring an entry point for people looking to buy gold, silver, and mining stocks.
This means we basically have to watch the price action now over the next few days or weeks for a bottoming formation. Gold is up today about a percentage, which is good, and does mean it could have put in a price low, but even if so it would likely retest the low or go sideways for a few weeks like it did in March before launching a sustainable rally. In fact $1800-$1850 is likely to now be a short-term resistance point for gold.
But, what is behind the drop factors in the decision of whether one should buy or not.
Many people are saying that the Federal Reserve and it’s talk on Wednesday is causing people to sell gold. Their idea is that they are hawkish now on interest rates and that is spooking people out of gold. If the Fed was about to make a monumental shift in policy I would think these people would be right to be worried about gold, but I’d suggest that really isn’t what is going on, because if people trading the markets were now suddenly worried about coming rate hikes we’d be seeing the US stock market drop and bonds too.
The market, though, has barely come off its recent highs and Treasury bond yields have gone down and not up.
The TLT ETF, which trades opposite to bonds has rallied since the Fed meeting!
TLT went up yesterday when gold fell hard. If the markets were worried about rising rates then TLT would have fallen too. It looks to me that bonds are going to continue to trend up into the end of July as that is about how long it will take for them to get fully overbought.
So, what is going on?
There is a simple correction playing out now in commodities across the board and an oversold rally in the dollar.
These two trends, which I believe are short-term, are what are impacting gold.
Commodities simply went up so much in the past six months that they got overbought and due for a correction/consolidation.
That is happening and hurt gold this week.
For example, take a look at the GCC commodity ETF. It got extremely overbought, in terms of RSI, after rallying for six months, and make a double top.
Now it looks like RSI is heading for an oversold reading. To do that it will have to go below 30.
Such a move would be a wonderful buy point.
Finally the dollar has made a base over the past few weeks and is making a rally.
It looks like the US dollar index has another 1/2 to full point left in it on this rally.
Gold’s strongest trading relationship, historically, and even today, is with the US dollar Gold tends to go up when the dollar goes down. Now the dollar is popping back up into resistance.
So, in sum, a correction in commodities and rally in the US dollar back up into its resistance are the biggest factors behind this week’s gold dip. When it comes to the overall stock market, volatility is still really shrinking.
-Mike
