Where Will Gold Prices Find Support?

Wednesday, June 1, 2016

Gold has now fallen for four weeks in a row and has come back into an important technical support zone. This is the lower range of the anticipated trajectory we have been outlining for some months. We expect prices to now begin to carve out a bottom, though this process may take some weeks to play out. Consequently, the final low may not be in place yet.

Last Friday, gold closed down $37 or some 3% from a week prior to finish at $1,215 per troy ounce.

The technical action warrants a thorough discussion, and for that we refer to the following 18-month chart of spot gold:

First, note that gold has now fallen $105 from it's recent $1,306 high. This is an 8% decline. It is fascinating to watch the shift in investor psychology with such a modest correction, as we observe a lot of fear in the precious metals sector at this time.

Of course, as investors in not only the physical metals but also the precious metals mining sector, we can see how such relatively small moves in the metals can translate into tremendous swings in the valuations of these companies. In gold's 22% move higher in gold from December through April, we saw 100-200% gains across many gold mining companies; and now, with the 8% drop lower in gold prices, we have seen 20-40% corrections across these same equities.

What type of gains will the mining sector see at $1,400...$1,500...$1,900 gold?

But, let's get back to the current price of spot gold. The price has broken through our short-term upward sloping trend lines, which are now shown above in turquoise for reference. This short-term technical breakdown means that gold will need to consolidate for some time before it is ready to advance through the $1,305 region that now serves as resistance.

It is interesting that the seasonal patterns are lining up. Note that we are now in the typically weak mid-year season for gold. The strongest season lies ahead, starting in August, which corresponds to demand from India due to the local wedding season there. Such strong demand should set the stage for our advance beyond the $1,305 resistance zone into the fall.

Fibonacci Retracement Lines

We have added Fibonacci retracement lines to our chart above, which are useful in gauging target levels during corrections from a primary trend. These can be seen in the light silver color. The three levels we focus on are the 61.8% retracement, the 50% retracement, and the 38.2% retracement. These are numerical patterns that exist repeatedly in nature, such as in waves, seashells, and hurricanes - and they also exist in the markets. The markets, of course, being a function of human nature.

Fibonacci retracement lines always measure from the high to the low of a significant move. In this case, we are measuring from gold's bottom, in December, at $1,048, to the top, last month, at $1,306.

Gold's Support Zone

With these retracement levels in place, we expect gold to find support in the range between $1,207 and $1,176, shown in green above. We have a confluence of important technical levels within this range, and thus, have a high level of confidence in the support region shown.

Technical analysis is about laying out a set of probabilities with the highest likelihood based on all the data we have available to us at a given moment.

The levels that define the green support zone are as follows, from high to low:

1) The 61.8% Fibonacci retracement level at $1,207, which was hit this week.

2) The buying interest at $1,205 in March (horizontal support).

3) The still-rising (blue) uptrend line from the December lows, currently sitting at $1,195.

4) The $1,190 resistance-turned-support from October 2015, which was exceeded, decisively, in February.

5) The 50% Fibonacci retracement level, which comes in at $1,176.

When we see a confluence of five important support levels within a $31 swath, it represents a high-confidence zone for a bottom to emerge for a correction.

Gold's Path Forward

We maintain that an important break in gold's primary downtrend occurred in February and that a new bull market is underway - one that will feature surges, consolidations, and corrections along the way.

Below, we review the 8-year chart for gold with our anticipated trajectory, moving forward, highlighted in green. In short, when prices bottom this summer, we look for a continuation of the move higher, which started several months ago. This bull market is just beginning.

Christopher Aaron

Christopher Aaron began his career as an intelligence analyst for the CIA and Department of Defense. He served two tours to Afghanistan and Iraq between 2006 - 2009, conducting pattern-of-life mapping for military leaders.

Mapping shares similarities with technical analysis of the financial markets because both involve the interpretation of repeating patterns found in human nature. He is the founder of iGold Advisor, providing research on the precious metals, and iGlobal Analytics, featuring technical analysis of the global capital markets.

Christopher speaks regularly on the cyclical patterns found within the financial markets and on international policy. He has been featured in the New York Times and NPR news amongst other publications.