By James Hyerczyk
From mid-May to early October, nearby Gold rallied from $1533.70 to $1798.10. The move was driven by thoughts of additional quantitative easing by the U.S. Federal Reserve. Investors who anticipated the Fed’s mid-September announcement of unlimited QE were paid handsomely, but those who waited or chased the market higher have to be wondering where all the buyers went.
Although the phrase, “buy the rumor, sell the fact” is used quite often, the five month rally in gold truly looks like this was the situation. After wallowing near the $1550.00 to $1525.00 area for several months, gold attracted buyers who were willing to support the market in the hopes of the next rally. These were probably gold investors who were looking for relatively cheap prices.
While gold is sometimes driven by speculation and by investors who treat it as a reserve currency, the gold investor wants to buy low and sell it higher. When gold prices neared $1500.00, investors found value. The move by the Fed was merely the catalyst to launch the rally into resistance. Once the news was out about QE, gold investors felt the move was over. The uncertainty over the economy was lifted and investors felt more comfortable moving money into equities.
While the Fed was busy pumping money into the economy, the European Central Bank was busy shoring up its sovereign debt situation. Once the uncertainty over Europe was lifted, some gold traders couldn’t find a reason to hold the metal and began paring their positions. The combination of investor and speculative selling is what is putting the pressure on gold at this time.
Technically monthly nearby gold is trading inside of a long-term range of $1942.30 to $1533.70. This range has created a retracement zone at $1738.00 to $1786.21. The rally from May to October basically took the market to the retracement zone with the top occurring slightly above the Fibonacci price level at $1798.10.
As we near the end of the month, the charts indicate that gold is weakening. Currently, it is trading below the 50% level at $1738.00. However, the bigger story is that it is forming a closing price reversal on the monthly chart. This chart pattern typically starts a 2 to 3 month correction equal to at least 50% of the last rally.
Based on this assessment and the short-term range of $1533.70 to $1798.10, traders should anticipate a potential break into the retracement zone at $1665.90 to $1634.70 over the next two to three months if the market forms the reversal top in October and if there is a follow-through break in November.