Gold Approaching Make-or-Break Level

Posted by jbrumley on February 17, 2017 9:29 AM
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If you're excited about the 9.6% rally gold futures have dished out since their late-January low, don't get too excited just yet.  The big test is yet to come.  That lies ahead at the $1262 level, which at its current pace gold could be testing by the latter part of next week.

The chart of gold below tells the tale.  Reversing course near the end of last year, the ensuing rally has been held a couple of times now by support at the 20-day moving average line (blue).  It's not been tested in earnest yet, however.  That test is the $1262 level where a key Fibonacci retracement line is lying in wait, and where the 200-day moving average line (green) will soon be.  Together, the two of them could make for four model resistance. [The Fibonacci retracement levels are based on a low from late-2015 and a-the middle of 2016; the $1262 level marks a 38.2% retracement.]

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The momentum is clear, but as was noted, the rally hasn't been significantly tested yet.

Of course, any discussion of gold's near-term outlook would be incomplete without acknowledging the role that the U.S. dollar has played.  

Gold only rallied beginning early this year when the U.S. Dollar Index began to peel back from a multi-year high.  See, gold is priced in U.S. dollars, and therefore what's bad for the greenback is good for the precious metal.  Over the course of February it appeared as if the dollar was on the mend, which ultimately spelled doom for gold's rally.  The gold bugs never threw in the towel though, which in retrospect was the right decision.  All it took was a brush of the 50-day moving average line (purple) by the U.S. Dollar Index on Wednesday to rekindle the dollar's weakness.  And, it was rekindled decisively.

That's as it should be, however.  While the U.S. dollar soared in 2014 and remained firm in 2015 and 2016, the bulk of that strength was rooted more in speculation that fundamentals.  Even if interest rates do rise in the foreseeable future - and the Fed has planned 2 to 3 rate hikes this year already - the dollar itself is still arguably overextended and ripe for weakness.

If that deserved weakness from the U.S. Dollar Index does indeed come to fruition, that's bullish for gold provided gold futures have actually hurdled would sure to be a contentious battle at $1262.  If that ceiling fails to hold the rally back, the next potential stop is $1311, with a more important target above $1262 is last year's peak around $1384.

Whatever the case, it's all well worth watching for the next few weeks.  It may also be worth trading.

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