Five reasons the gold rally is under threat

Gold's impressive rally continues. But are we nearing the end of the road for this recovery? John C Burford looks to the charts for clues.

Gold continues its impressive rally off the late December $1,530 low, having reached the $1,670 area over the weekend. But are we nearing the end of the road for this recovery?

When I last wrote about gold, I had a chart showing the Fibonacci retrace levels where my upper target was indeed the $1,670 area. Here's that chart again:

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

(Click on the chart for a larger version)

Here is the chart updated to this morning:


(Click on the chart for a larger version)

Advertisement - Article continues below

You can see how the major downtrend line off the $1,920 top meets the 62% Fibonacci retrace. This area in the blue box should represent major resistance.

But there is more, as I will show.

Gold is running into major resistance

Take a look at this next chart the thick red bar shows the support/resistance zone for previous attempts on this level.


(Click on the chart for a larger version)

So let me just stress that. Not only is the market testing the 62% Fibonacci level and the major downtrend line drawn off the all-time $1920 high. It is also running into major resistance at the red bar.

This is a triple threat for further advances. But there's more

Advertisement - Article continues below

OK, now let's have a look at the latest COT (Commitments of Traders) report.

One of the clues that helped me identify the $1,920 top last year was the heavily overweight long futures holdings by the speculators. The short positions were held by 'the trade', which are considered the strong hands.

The trade is comprised mostly of the gold miners who are genuinely hedging their production now and into the future (the origin of the term 'futures'). The miners are not very concerned with movements in the underlying gold price, since they have already sold their production forward. That is why they are the strong hands as they will generally only lift their hedges as they make deliveries.

On the other hand, the speculators hedge funds and private traders are very much concerned with gold price movements! They are much more likely to trade in and out of positions based on price movements. The more leveraged the speculator, the weaker their hands. And look at the latest data

It's starting to look unstable

Here is the latest COT report:

Hedge funds (large)167,00031,000
Small traders58,00021,000
Speculators (total)225,00052,000
The trade172,000345,000

In the specs camp, for every short future held, there are 4.3 long futures.

Advertisement - Article continues below

This is veering towards the unstable and yet another reason to suspect a top is nigh.

Of course, it is unwise to time a trade solely on the basis of a COT report, but it is one piece of the jigsaw. And there's another clue that I think could point to a move lower in gold.

For this, let's return to my tramlines. Have a look at this chart of the January rally:


(Click on the chart for a larger version)

I showed these tramlines in my previous gold article and since then the market has been trading between them. The market is now approaching the upper tramline.

So add that to the case and we now have a quadruple threat to gold's rally!

Advertisement - Article continues below

Finally, there's even a potential fifth threat to the rally the high momentum reading, shown in this chart:


(Click on the chart for a larger version)

The momentum reading currently lies in the area identified with three previous highs. That could be another ominous sign for gold!

As I mentioned last time, I do have a concern that there is no clear A-B-C three-wave structure to this rally. That would be my ideal scenario.

So that would make my most likely forecast a top near current levels for the A wave, then a decline to a B wave low, and then a possible new high in the final C wave.

But with the specs crowding onto the long side again, we may well see a large dip that could blow this scenario out of the water.

Advertisement - Article continues below

Let's see how this plays out.

If you're a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading Advanced tramline trading An introduction to Elliott wave theory Advanced trading with Elliott waves Trading with Fibonacci levels Trading with 'momentum' Putting it all together

Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .



Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019