Gold has been trading in a range around the psychologically important $1,300 level, and yesterday was no exception.
While the day-to-day fluctuations in bullion prices are oftentimes more headline-driven than fundamentals-driven, gold investors and traders need to understand where prices are in relation to the prevailing long- and medium-term trends.
Knowing these trends can help you to make better strategic decisions about whether to hold, hit the exits or "back up the truck."
If you don’t know the trend, it is very hard to know if your entry and exit prices are good or bad.
To illustrate, let’s look at a long-term chart for gold:
Gold broke out of its long-term trading range in 2002 and entered a bull market. (I drew a black circle around this area.)
We know from studying technical analysis that long-term trends normally are longer than 3 months and can last for decades.
What About the Current Trend in Gold?
- Despite recent weakness, gold remains significantly above the long-term (solid black) trendline. This means the long-term gold bull market is still intact.
- In a bull market, it is normal for prices to accelerate from the long-term trendline. You can see this in the dashed and dotted trendlines.
- In the rose-colored area, prices accelerated and entered a correction below the accelerated trendline. Gold stayed above the long-term trendline during the correction, leaving the long-term bull market intact.
Prices consolidated in a trading range from about $700 to $1,000 for almost two years. This is normal for commodities.
Stocks are different. Stocks usually don’t trade sideways for longer than a few months because they have quarterly earnings announcements.
- Following the 2009 breakout, the gold bull market resumed and peaked in 2011.
- In 2012, prices broke below the accelerated trendline and gold entered another major correction period. As in the prior corrections, gold prices remained above the long-term trendline and kept the long-term bull market alive.
- Gold prices found a bottom last year and remain in a trading range. The new bottom in the $1,200 area now acts as support.
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At $1,200, the gold price is also near its production cost for many gold miners. You may want to read my recent article on the costs of producing gold. The article explains how production costs have grown over time.
I anticipate that the cost to produce gold (leases, royalties, labor, general administrative expenses, environmental costs, and financing) will continue rising.
Higher gold production costs and inflation will probably be the main catalysts for gold’s rise over the long term.
For now, we can still trade gold within its current range. Let’s look at a current chart for the gold ETF, symbol GLD.
Let’s review the chart:
- The GLD found a bottom last year at the $115 level.
- Prices have been consolidating for almost a year between the $115 support and resistance from $130 to $150.
- This trading range should persist for the foreseeable future.
- Gold’s current pattern is neutral with a symmetrical triangle, declining tops and rising bottom trendlines. This tells us participants are selling rallies and buying pullbacks.
This is normal behavior. Traders want to buy before the previous pullback, and sell before the previous peak.
Commodity prices normally follow the major dominant trend. In this case the dominant trend is bearish, so a pullback to the $115 area is possible. Shorter-term trends are harder to predict.
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