Since mid-June, gold has been in a rather boring state. The price is moving sideways, oscillating around $1,770 an ounce. Gold prices wouldn’t be a topic of interest, if it wasn’t for this one thing - soon this sideways trend will end and we will experience some sharp movements.
To predict the direction of gold, we need to address a few topics that have great influence on the price. The first is inflation. Gold is excellent in protecting itself against inflation - it’s marvelous in times of hyperinflation or when inflation is accelerating rapidly.
At times of a low inflation, gold isn’t the best option. Policymakers often repeat that inflation is transitory and shouldn’t be a worry for the long-term. On the other hand, CPI (consumer price index) readings are climbing, often exceeding consensus. People are starting to lift their eyebrows when receiving a checque and it doesn’t look that this situation will end soon.
‘Transitory’ is one of the trendiest words in the fintech industry and it will be exciting to see how it will work out in the future. Speeding inflation can be a positive factor for gold and let’s just say that in our analysis, we put this as a pro.
Where is the dollar heading?
Another factor is the dollar. A weaker dollar means gold is stronger and a stronger dollar means the precious metal is weaker. This inverted correlation is pretty strong, and can be a reliable tool until some external factors jumps in and destroys this piece of the puzzle. Since May, the dollar index is climbing significantly higher, which is definitely blocking a large chunk of gold’s potential.
It’s hard to expect a reversal. So, this goes as a con on our list. It’s important to point out that this inverse correlation can be a good tool to help you forecast the price of gold.
But it can’t be taken for granted as it doesn’t work every time. One current example would be oil. Also quoted in dollars, but not at all being affected by the stronger greenback, which in theory should be a negative factor. Actually, maybe it is and if the dollar was weaker, then would we see the barrel costing $200? Who knows…
Now my favorite part – gold is in a strong uptrend since 2015. The second-half of 2020 and the whole of 2021 is a bearish correction. I repeat: a correction, not a reversal. Why?
Watch this number
Because the price is still above the 38,2 per cent Fibonacci - around $1,680. Why is this important? Because it’s considered a golden support, with a very high rate of success.
You don’t have to believe in it, it’s enough that traders do. As for the buy signal, it hasn’t been triggered yet. For that, we need to see the price climbing above $1,835. That’s an absolutely crucial level for gold.
Once that higher number hits the screen, it will be the mother of all buy signals that thousands of traders are waiting for. With the $1,835 level being broken, reaching $2,000 should be just a matter of time. Something enjoyable and as easy as a Sunday walk in a park.
For now, most traders are patient – because the price isn’t really moving, or it’s moving but mostly flat to the right. Once the $1,835 is breached, the Eldorado will happen again…