Gold Price Forecast: Watch for a September Rally

Wednesday, August 24, 2016

For seven weeks now, gold has been bumping against its long-term down trend that has kept prices in check since 2011. Below we show the 8-year perspective for gold, noting the down trend in question (shown in magenta) that has been acting as resistance each time the precious metal attempts to stage a move higher.

Gold finds itself directly in the crosshairs of a battle between precious metals bulls and bears. The bears are attempting to hold the metal down at this level, because a breach of a long-term trend line would be a major technical event in the eyes of many investors. It would be a signal to the mutual funds and institutions waiting on the sidelines that the 2011-2015 bear market is decisively over.

Having been mostly on the sidelines from 2011-2015, we are in the bullish camp at this juncture. Consequently, have a reasonable expectation that this long-term down trend will be broken in the near future, possibly as early as September.

Why September For A Gold Breakout?

Gold has been consolidating for most of the summer with resistance sloping downward at the aforementioned trend line…and support coming in near $1,310. Gold spiked as high as $1,318 on June 16.  As of today August 24, the price is only $20 higher at $1,338.

Seasonally speaking, this consolidation has taken place during the weakest time of year for gold – i.e. the summer. A consolidation during the weakest season of the year actually shows a cyclical relative outperformance. New buyers are stepping in and metal is being transferred from weak to strong hands throughout this consolidative process.

Of course September coming up is the single strongest month of the year for gold based on data available for monthly trends. Much of this demand comes out of India prior to the traditional wedding season, which is in October.

Let us not overlook: gold demand out of India is a critical component of the physical market. Indeed, India consumes more gold than any country outside of China. For perspective, Indian demand is greater than that of the United States and Europe combined. And, most of this demand occurs in September prior to the wedding period.

Gold Seasonals Over The Last Five Years

Since the start of the 2011 precious metals bear market, gold has not adhered to its traditional seasonal patterns as shown above. Investor selling pressure has been too great and has overwhelmed seasonal demand.

In fact gold has had only one monthly gain in September during the last five years. Here is the breakdown of the recent performances during the historically-strongest month:

September 2011: -10.9%

September 2012: +4.8%

September 2013: -4.7%

September 2014: -6.1%

September 2015: -1.6%

At four out of five losing Septembers with three in a row, gold is due for a reversion to the mean. We are expecting a positive month ahead.

Yet, it is not so much that a positive September by itself would be noteworthy, but rather the ramifications of such a gain for the long-term charts.

Zooming gold into the 18-month perspective, we can see the near-daily hits against the previously-mentioned long-term downtrend that are now occurring. The resistance zone in question comes in between $1,355 - $1,378, so it will only take a $40 (2.9%) gain in gold to decisively break this long-term trend. An average September performance of +3.2% will be all this market needs to start accelerating through the remainder of the year.

Another Catalyst - Weak US Dollar?

Could there be an additional economic reason for gold to stage a rally this autumn? We believe there is a strong possibility of something negative brewing in the currency markets for the US dollar -- and typically a weak dollar causes investors to flock to precious metals.

Shown below is the US Dollar Index, which measures the dollar against a basket of international currencies over the 18-month timeframe.

This chart is weak from a technical perspective.

Resistance is well-defined between 99-100 on the Index.  Meanwhile, each successive move into the support zone near 93 has shown technical "cracks". First in August 2015, we note the low in the Dollar Index broke briefly lower to 92, and then in May 2015 the low broke further again to 91.5. These technical cracks in the form of lower lows are alerting us that buyers are not as determined to support the dollar at this juncture as some might assume.

Currently, the dollar finds itself perched precariously just above a medium-term support line at 94 (shown in blue). The trend is sloping downward. A break below 94 and the dollar will be retesting recent lows near 91-92 in short order. Based on the technical weakness observed over the last year, we believe the dollar may be headed below its 18-month support zone when such a retest does occur.

Takeaway On Gold Prices

Gold is consolidating just below a key technical breakout point during this, the end of the weakest time of the year for the precious metals. Strong seasonal demand is expected out of India next month. The US dollar is vulnerable to a breakdown should a failure at the recent trendline occur. Those without sufficient exposure to the precious metals complex at this juncture should consider any remaining late-summer weakness as an opportunity to finalize their medium-term positions.   


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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.