The price of gold is probably the most hotly debated topic amongst the financial community, with its fans and opponents holding deeply entrenched views and opinions but often leaving many traders confused. To add to this confusion, many of the once traditional relationship between the precious metals and other instruments, such as gold and the US, have now broken down. The reason for this is not hard to see, given the artificial creation of currency weakness via the mechanism of quantitative easing, the associated bloating of bond markets, and the apparent lack of clarity from the FED about the time scale for ending this programme. Is it any wonder that the markets today are in a constant state of flux, and even more so in gold which also has the precious metal tag coupled with the inflation tag, to add to its baggage.
Forecasting the long term, or even medium term direction for gold is almost impossible, but at least with volume price analysis we have some idea of what is going on in the minds of traders and the big operators, based on logic and common sense.
Moving to the daily chart for gold futures, we have now rolled forward to the December contract for a view of the likely direction for gold in the short term. The first, and perhaps most obvious point to note on the chart is that the precious metal is currently range bound between $1305 to the downside and $1335 to the upside, where trading has remained for the past two weeks. It is interesting to note that the breakout from this congestion phase of 22nd July, on a wide spread up candle was only associated with average volume. A clear signal that this move was not going far, and confirmed by subsequent price action.
The current congestion is defined by the yellow dotted line to the upside and the purple dotted line to the downside, and the depth here is self evident from the volume at price indicator. Moving to the traditional volume bars we can see that over the last few days we have rising volume associated with falling prices, and as such signalling weakness for the price of gold.
Any break below the floor of current support in the $1305 per ounce region will see gold move back to test the $1270 region in the short term, and longer term the $1220 per ounce area.
Any move higher, first has to breach the $1350 resistance, and then move through the sustained congestion which extends all the way to $1420 per ounce and beyond. So a hard road and one that will need to be accompanied by high and rising volume, something that is clearly lacking at present on the daily chart.
From a fundamental perspective the lack of volume may simply be seasonal, as longer term the outlook for the precious metal looks positive. Not least because in the last decade there has been a seismic shift in sentiment towards gold from west to east. Indeed, demand for gold coins and bullion has 22% and 52% from China and India, respectively.
Finally, the weekly chart for gold really sums up the technical picture, with the precious metal lurching lower, recovering and then falling again. The price action in July appears to be following the pattern we have seen repeated since the beginning of the year. What is also interesting is last week’s volume and associated price action which, in itself, is sending a strong signal of weakness in the short term.
By Anna CoullingGoogle+