As readers know by now, we look at precious metals from two angles, i.e. from a fundamental and a chart point of view. The reason is that fundamentals can be great, but only the charts will reveal an increased investor appetite.
Breaking The Resistance Level
What the gold chart is telling us right now is that we are close to a major hurdle, i.e. $1250 an ounce. The red line on the chart below shows that 1250 was touched several times in the past. One year ago, the price was oscillating around 1250 before it rallied much higher until March. In June, 1250 acted as support. So far, so good. However, in September, gold broke through that critical support line and it became resistance since then. Look how gold failed to break through 1250 in October and in December. January 2015 is the third attempt to break that long term resistance level.
The longer a trendline stays intact, the stronger it is. That is the reason why $1250 is a critical price for now. Eiter gold will break through it, which would suggest higher prices in the short run. Either it will fail, which would imply weakness and lower prices going forward.
Mind as well how two other trendlines are currently active on the chart. The blue line represents a downtrend which started in July. Gold bulls were able to break through that line last week. The green dotted line shows the pattern of higher lows since the multi-year low in November. So far, price action is encouraging for gold bulls.
To get an idea of the strength of the current trend, we suggest readers to monitor the following three data points. First, gold needs to break trough the important price level of $1250. Second, in order to respect the pattern of higher highs, gold should not structurally trade below $1200 (with “structurally” we mean that gold should not close two consecutive days below $1200). Third, the miners as represented by the indexes HUI or GDX should show at least similar strength as gold. In other words, if gold would break through 1250 but the miners would be lagging behind, it should be considered a divergence within the precious metals complex indicating weakness.
Our estimate is that the probability of gold going higher from here is approximately 75%. However, we believe seasonality is supporting this trend, as well as extreme weakness in the gold market during the second half of 2014. The probability of gold holding its gains towards Q2 of this year is definitely lower. On the other hand, we don’t expect a crash similar to 2013, not at all, unless commodities and stocks would capitulate. Stay tuned, and pay close attention to the chart patterns to get an idea of what is coming.