Mining for Money: Gold Will Surge to Fill the Gap

The market is thinking that gold is topping out here, hammered by expectations that the Fed will raise interest rates.

Sure, gold zigs and zags. A short-term pullback never surprises me. Still, investors should really be keeping their eyes on the gap higher. Because gold wants to fill that gap.

What gap am I talking about? The huge gap in volume that lurks overhead.

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On this chart, the dark line is gold’s price action. You can see it is testing overhead resistance.

The horizontal bars are "volume by price." In other words, this shows the amount of volume at each $20 increment during this nine-month period. The gray side of the bar is bullish volume; the pink side of the bar is bearish volume.

You can see an area where the price moved so quickly that there was little to no volume. This formed form what you might call an "air pocket" in price action, leading up to $1,310.

You see, price has what traders call "memory" because of trades done at different prices. If there isn’t any trading volume at a particular price, there isn’t anyone who got stuck holding shares there. So when a stock gets back to that price again, there’s nothing to stop it in either direction.

  • On the way down, these air pockets can lead to big drops.
  • On the way up, the air pockets can lead to explosive rallies.

The first time I wrote about this chart, on Feb. 6 for another publication, there were two huge gaps in the volume-price action. The first one led up to $1,250. It was filled shortly thereafter.

Now, we have this next gap to fill. This one peaks around $1,310. And gold wants to fill that gap.

And sure, it could take gold a while to work through overhead resistance at $1,250. In fact, I’m counting on it.

But the trend is higher … gold is in a new bullish cycle … the world has hit "peak gold" mine supply … and the Fed’s rate hikes aren’t the bugaboo the market makes them out to be.

So sure, maybe gold will go back and test its uptrend. If we’re lucky. That would be a heck of a buying opportunity. But then — THEN —  that gap will call gold higher like a siren song.

It wants to be filled. Be ready for it.

Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit. Working on…