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There is a lot of focus on the price move in gold. What happens next to it’s price is more important. Potentially a binary event ahead.

Gold has broken above the strong resistance zone shown on the daily chart. This is bullish.
Gold trades around the clock. However, that is not the case with ETF GLD. The daily chart shows a gap open in ETF GLD above the resistance zone. This is highly bullish.
The move in gold occurred on a good volume on both the daily and weekly charts. This is bullish.
The weekly chart on gold shows a bottoming pattern. This is bullish.
RSI on both daily and weekly charts is overbought. This is bearish in the short term and indicates a pullback if the news flow stops being supportive.
The weekly chart shows that for the long term gold is still in the resistance zone. For gold to go to a new high such as $2000, gold will have to decisively break the top band of the resistance zone shown on the weekly chart.
For very short term trades, the top band of the resistance zone shown on the weekly chart is a potential target.

Three Events

Three events have accelerated gold’s rally.

European Central Bank (ECB) unexpectedly turned more dovish than the consensus.
The Fed followed the ECB with a dovish message.
Iran shot down an unmanned U. S. drone.
The Next Big Event

The next big event is the meeting in Japan between President Trump and President Xi at G20. If the two sides strike a good long term deal, the probability is high for gold to fall as much as $100 in a short period of time.

On the other hand, if the acrimony between the two sides drastically worsens and Trump goes ahead with additional tariffs, gold moving up by as much as $200 over a period of a few days is not out of the question. There are three reasons for this:

Breakdown in talks will put additional pressure on the central banks to provide more monetary stimulus. Monetary stimulus is good for gold.
Breakdown in talks will increase the probability of a recession. A recession will be friendly to gold.

A big part of gold’s rally has been a short squeeze. In a short squeeze, short sellers who previously bet on gold falling, feel compelled to buy to cover and thus exaggerate the move up. There are still a lot of shorts sellers in gold. Further, new short positions are being established based on overbought conditions. The conditions are ripe for another leg up in a short squeeze if there is new good news for gold.

Gold Stocks

Of note is that important gold stocks Newmont Mining (NEM) and Barrick Gold (GOLD) are breaking out. Also breaking out are gold miner ETFs (GLX) and (GDXJ).

Trading Gold

Triple-leveraged gold miner ETFs are excellent vehicles for short term trades — (NUGT) for the up move and inverse ETF (DUST) for the down move.

However, lately, there have not been good setups in DUST and NUGT.

Author:

Prof. Kuber Sharma

Columbia Business School Alumnus.

Faculty JK Business School.

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