Gold Price Faces Huge Test At $1,300

Gold is back to within $40 of the most important technical level we have been watching since 2011: the primary declining trend shown in magenta on the 10-year chart below. The downtrend in question now comes in squarely at $1,300 – so a new test of the trend line could come as soon as this week:

The breaking of this downtrend – whether it happens this week or perhaps later in the year – will be one of the strong technical confirmations of a new bull market for gold.

We saw the strength of the sellers on no less than four separate occasions last year, appearing each time the downtrend was tested: first at $1,378 in July, then $1,372 in August, then again just above $1,350 in September, and finally at $1,338 in November.

Although the next series of breakout attempts will be occurring at lower prices, the significance of the breakout -- when it occurs -- will be no less significant: it will indicate an exhaustion of the last determined sellers who are disposing of their gold following the decline of 2011.

A Future Gold Price Target

When the trend is finally broken, we calculate a target of a $330 added to the breakout point within 12 months. For example, should the trend break later in 2017 at $1,250, the target for the post-breakout surge would be $1,580. Should the breakout occur this week at $1,300, our primary target would be $1,630. The expected gain is derived from the amplitude of the consolidation off of the 2015 bottom.

This move should be a strong sustained advance similar to the early 2016 rise from $1,045 to above $1,375.

However, this calculation is for the future – let us not get ahead of ourselves.

Gold Short-Term

For the week, gold rose $19 or 1.5%. The final trade on the New York COMEX on Friday was $1,258.

The odds of gold breaking above $1,300 immediately (the zone labeled “Strong Resistance” on the chart) are low, due to the confluence of resistance levels that appear in this region, and the extraordinary volume of sellers who are likely to exit at break-even after holding futures contracts since the night of Trump’s victory.

Relative Performance Of The Mining Sector

As a confirming indicator, relative weakness has been noted in the gold mining complex compared to bullion over the past two weeks.

In essence, the gold mining complex is “sniffing out” the pending short-term top that we are expecting in gold.

Evidence can be seen at right with the relative comparison of the GDX mining fund on top, and the GLD (gold proxy) fund on bottom. Note how since the February 8 peak, the miners have declined 5.8% amidst a gold price rise of 1.2%. The miners are showing relative weakness at this juncture in anticipation of a short-term reversal in gold at some point in the near future.

We do not believe that this short-term negative divergence is reason to question the longer-term thesis. Perspective is critical.

Relative weakness in the mining complex over the short-term is to be expected, due to the relative strength that the miners had shown over the previous two months.

At right we update the chart from a week prior, again noting that the miners had already priced in $1,300 gold as of February 8.

Gold is now playing catch up and the miners are digesting recent gains.

Takeaway On Gold Prices

For now, we will monitor the action as gold approaches $1,300 for the possibility of a short-term reversal. A more powerful move will result from a breaking of either the long-term downtrend or the rising support line later this year.

********