Sideways Trend in Gold: Healthy Technical Pullback or Topping?

GDX/GLD Ratio (GGR) Analysis: The Rise of Gold Stocks Doesn't Stop Now
Published on: Jun 19, 2024

On May 20th, the price of gold reached a historical high of $2,450 per ounce. However, it has since fluctuated and fallen back, currently hovering around $2,330. Over the past two months, gold prices have been consolidating in the high range of $2,300 to $2,400. As long as the price does not break the critical support level of $2,277, both bulls and bears have ample reasons to justify their perspectives.

From the perspective of gold bulls, the price has been rising for eight months, with a peak-to-trough increase of over 35%, indicating a technical need for a pullback. In this context, the recent high-level pullback and range-bound consolidation are merely stages in the ongoing upward trend. Furthermore, since mid-April, the gold market has withstood significant downward pressure during six days of heavy selling, not only avoiding new lows but also initiating a rebound from $2,277, which briefly reversed the trend and led to a new historical high.

However, at the historical peak of $2,450, gold bears began to exert pressure, leading to a continuous decline in prices over the subsequent four weeks. Eight days ago, the gold price hit a low of $2,287. Last Thursday, it was $2,296, facing enormous pressure again as it approached the $2,300 mark. Fortunately, last Friday, the price successfully broke through this psychological level, finally closing at $2,332.

The oversold daily stochastics has triggered a new buy signal, making it highly likely that the gold price will once again attack the $2,400 level. The upper Bollinger Bands on the daily chart suggests that the price could rise up to around $2,412. If the gold price recovers the resistance zone near $2,340 and the 50-day moving average ($2,345) in the coming weeks, it will form the right shoulder of a head and shoulders pattern.

From a supply and demand perspective, since the end of 2022, approximately 13 million ounces of gold have flowed into the market through Western gold ETFs. However, massive gold purchases by multiple central banks around the world and strong physical gold demand in China have significantly driven up prices. From the bottom of $1,615 in the fall of 2022, the gold price has risen by about $835 over the past year and a half, an increase of over 51%.

According to data from the World Gold Council (WGC), China’s official gold reserves have risen for 18 consecutive months to 2,264 tons, accounting for 4.9% of its total foreign exchange reserves. However, the People’s Bank of China’s gold buying efforts have recently weakened, even stopping gold purchases in May.

Although gold prices will experience short-term fluctuations, the long-term outlook suggests that the gold bull market is far from over. It is highly likely that gold prices will break through $3,000 in the next 6 to 24 months. The reasons for being bullish on gold are as follows:

– Global economic uncertainty

– Inflationary pressures

– Central bank interest rate cuts and quantitative easing policies

– The continuous weakening of fiat currencies

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