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Is this Gold’s “revenge” following a multi-year low, highlighted by the July 20 bear raid, a merciless pummeling in the mainstream media and a commentator’s remark that the yellow metal is just a “pet rock“?

Benefiting from currency and equity market instability (a key trigger for bullion was China’s recent devaluation of the yuan), Gold blasted through its 50-day moving average (SMA) today to close at a 5-week high of $1,153.  There was obviously some short-covering this morning, but the potential exists for a lot more.  Keep in mind that non-commercial COMEX Gold short positions reached record levels at the end of July and remained there through the middle of this month.  This unprecedented level of bearishness, evident elsewhere in the Gold market including ETFs, has been a compelling reason to run in the opposite direction of the herd as we did when bullion touched important support around $1,070 while the doomsayers were calling for an imminent meltdown to $1,000.

While it’s difficult to say at this point if Gold has actually found a final bottom – ultimately, it could still test $1,000 – what is clear in our view is that this current move has room to grow in the weeks ahead, so the long opportunity continues (no reason Gold should stop at $1,150, though that is resistance that must be overcome as per the chart below).  Seasonal factors are also in bullion’s favor.  In addition, the U.S. Dollar Index could come under more intense pressure, given its weakening technical posture, especially if the Fed backs away from a rate hike in September (the Dollar is still a crowded trade).  We highly doubt the central bank has the courage to raise rates in the current global environment.

The “Golden” Chart

John’s 2.5-year weekly chart for Gold has been like the “bible” on bullion trading since late 2013.  It allowed for correct bullish calls on Gold in December 2013, November 2014 and again just recently.

Simply put, Gold has been consolidating within a downsloping flag for more than 2 years as you can see below.  Consistently, it has tested the top of that flag (resistance) and the bottom of it (support).  Recently, during Gold’s drop that continued for 7 straight weeks (the longest weekly losing skid since 1999), the metal again touched the bottom of that flag while RSI(14) landed at previous support going back to 2014.  The slide had exhausted itself, at least for the time being.  First significant resistance on the way back up was $1,100 and just slightly above that.  The vigorous push through $1,110 this week was a clear signal that Gold was ready to quickly test the $1,150 resistance.

Where to from here?

Note the strong up momentum in the RSI(14), the bullish low “W” in the SS indicator (similar to late last year), and the potential for a bullish +DI/-DI crossover.  A fresh band of support should exist between about $1,130 and $1,140 – the 40 and 50-day SMA’s, respectively.  As long as the bulls can hold that ground on any pullback, they’ve got momentum in their favor.  What could unfold is a 2-steps-forward, 1-step-back sort of scenario, or potentially something more explosive given current global volatility across a myriad of economic and political landscapes.

The possibility of Gold making its way back to the top of the downsloping flag (currently intersects at approx. $1,250) within the next couple of months has to be considered very real, and a growing number of Gold stocks (producers and some of the best quality juniors) are looking exceptionally bullish.  They will outperform the metal and should serve as an island of relative safety, as they did today, in any troubled waters in the equity markets.