Gold: The Bears Have Been Crushed, But Pain May Still Be In Store

I have some great news for the gold bulls. After gaining more than 2.7 percent last week, gold closed at a fresh five-month high of $1,290.1. I am of the opinion that the rally still has legs and gold can easily continue its ascent in the coming weeks as well. In this article, I will discuss the price action in gold and the SPDR Gold Trust ETF (NYSEARCA: GLD) using technical price charts. The bears (or shorts) have been crushed with the sharp rally but they may still face enormous pain in the near future. This might just be the beginning of another bull run.

http://ei.marketwatch.com/Multimedia/2016/09/26/Photos/ZH/MW-EW610_Gold_2_20160926094251_ZH.jpg?uuid=1e6501ac-83ef-11e6-97bf-00137241c023

Source: MarketWatch

Exactly seven trading sessions have passed since my last article on gold titled Gold – The Wait Is About To Be Over in which I had advised my readers and followers that a breakout was about to occur in the precious metal and the ETF. This is exactly what I had said regarding both:

The following daily gold futures price chart clearly tells that gold is maintaining its higher lows and that declines are being quickly bought by investors. I believe that the precious metal will deliver now. And when it does that, it will attempt to tackle the medium-term downward resistance (the red trendline) placed in the $1,280-$1,300 range.

With the bullish momentum in lead, I believe that the underlying gold ETF, GLD will also cross its 200-day SMA at $120.15. I had expected GLD to cross the $120 barrier last week, and although it did touch $120.08, the minor pullback in the precious metal brought down the ETF as well. As the underlying strength remains strong – the current 14-day RSI value is 61.23 – we can reasonably expect levels of $122 in the next couple of weeks.

Clearly, the bulls have once again demolished the bears as the predicted targets have been successfully reached in the said timeframe.

Since my previous article, some events have transpired which helped gold such as Syria and President Trump talking down the U.S. Dollar. But rather than these events, what shocked me more was the urgency of some commentators and analysts to come out and make calls predicting the next move in gold. For example, during the Syria event, when gold was higher in the day, many took the opportunity to declare that a breakout has happened, while when it came back to the ground, many called that a top was in place for the precious metal. All of this took me back a bit. Why rush the decision to call it a top or a breakout? Would gold not have broken higher in the absence of Syria? Could a single day’s volatile price action be sufficient enough to make such calls? I tend to disagree with such rash opinions.

Having said that, I believe it is of paramount importance that we think clearly when making such decisions. The daily gold futures price chart submitted below shows that after a brief period of sideways action, gold has respected the underlying strong momentum and broken past the immediate resistance of $1,260. With this, it has extended the classic higher top, higher bottom formation and shows no signs of stopping anytime soon. As I stated in the last several articles, gold still remains a buy on dips.

Source: TradingView

The action in the gold market viewed on a weekly basis indicates that gold has reached the medium-term resistance. On the verge of a breakout, gold can easily test $1310 in the next 1-2 weeks. The following weekly price chart reveals that the precious metal had earlier respected this level technically. In July-Sept 2016, $1310 acted as the support while following its breakdown in October, it has been difficult to breach it on the upside.

Source: TradingView

The SPDR Gold Trust ETF is showing a better performance than the precious metal. The daily GLD price chart validates that the ETF has not only taken out important resistances but also negated the medium-term downtrend. The breakout recorded in GLD sets it up for an easy target of $125 in the immediate term.

Source: TradingView

At this point, some valid concerns are beginning to crop up that the 14-day Relative Strength Index has reached its highest level of the last one year i.e. 74.87, and may cause a selloff in the ETF. This is not entirely correct. Overbought conditions in GLD do not necessarily have to lead to a selloff but minor dips cannot be ruled out. It never has to be a straight line advance to the target price.

Gold – The Beginning Of Another Bull Run?

It may sound like a fantasy story right now but I believe that we may be in the early stages of a bull market in gold. The following multi-year monthly gold futures price chart provides an interesting perspective. Let’s look at the rate of change in the price action on a bigger timeframe.

Source: TradingView

From October 2012 to June 2013, gold had lost almost one-third of its value from the peak of $1,800. The merciless decline had discouraged even the most optimistic investors. Even after this massive decline, the pain was not over for the bulls as the precious metal was thrown in the throes of another downtrend which pushed the price down to a low of $1,045 in December 2015. The rate of decline in gold prices had reduced sharply in this extended period. The pessimism was waning off. In the 30 months from June 2013 to December 2015, gold shed just $135 (if we compare the lows), which is nothing to be concerned about.

The first point of the turnaround was the heavy buying interest seen near the December 2015 lows. In the following seven months i.e. by July 2016, the yellow metal had raced to $1,377.50, breaking not only the downtrend (indicated by the rectangle in the chart) but setting the stage for a sustained upmove. In December 2016, it tested $1,124 and is now once again breaking higher. If the previous peak of $1,377 can be taken out and sustained, then my long-term bullish thesis will be confirmed from a technical perspective. It would mark the onset of a fresh bull run, and therefore, things are going to get very interesting this year.

Conclusion

Gold is in a phenomenal phase right now. The precious metal has met my discussed targets and there may be more gains in store. I expect it to test $1,310 in the next week or two. The SPDR Gold Trust ETF GLD has given a powerful breakout from its medium-term downtrend and it should test $125 soon. Bears have been proved wrong once again and they must cut back on their short positions or risk incurring huge losses.

The overbought conditions in GLD must be compelling some participants to take profits. But barring intermittent minor dips, I believe the target will be reached. Similarly, gold continues to remain a buy on dips candidate. The level of $1,260 which until now had acted as a strong resistance should act as a support going forward.

An interesting theory that is spinning in my head is that we may be in the early stages of a strong bull run in gold. My bullish perspective will be confirmed if going ahead we can cross the previous peak around $1,380. The stage is being set for a big move in gold prices.

This again is just my interpretation of the price action in the gold market. I could be wrong in my assessment, so please complete your due diligence. I would also love to read your views and opinions on this subject. Do you agree with my thesis or do you have a contrarian view? Please share in the comments section below.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.