Gold's Current Rally Vs Trend And Seasonality
FinGraphs.com | Feb 04, 2016 06:20
Gold is still widely perceived as a safe haven in times of increased volatility, and this period of equity market sell-off since the beginning of the year is no exception. Gold is rallying against its longer term downtrend, more than $80 over the last 6 weeks, a move which is fuelling speculation that a major reversal may be in the making.
Since Gold turned down for the worse in 2013, we may recall several other snappy bear market rallies (summer 2013, early 2014 and 2015, late last summer), yet there is a feel that this one should be taken seriously amid market uncertainty and a longer term trend of Gold which could be flattening.
Gold Weekly Chart: is the downtrend exhausted?
Indeed, on this weekly chart of Gold, above, taken from our FinGraphs platform, we can see that following its brutal fall in 2013, Gold has been drifting lower, since then, at a more measured pace. One may even identify a potentially large reversal prone “falling wedge” pattern (not completed though, i.e. no break-out yet). Our Risk Indicator (lower rectangle) is now Oversold and prices have reached our Impulsive targets down (red oval price projection). So yes, there is a sense of exhaustion in this longer term downtrend, yet at FinGraphs, we are not prone to Bottom Fishing.
Let’s try to gain perspective with the following Investor’s view (3 time-frame: Weekly, Daily, Hourly).
Gold Investor’s View today: “Potential Pullback in a Downtrend”
This view is a combination of a Weekly, Daily and Hourly chart. It is meant to give an instant view of how trends relevant for Investors interplay. At present, the automatic interpretation of this chart is still labelled as a “Potential Pullback in Downtrend” (top right corner 3D MARKETS POSITIONING). This means that the longer term downtrend is still in place for now.
Now focusing on the Daily chart (middle chart), it is only in a correction up for now (“C up”, grey oval price projection) and it is nearing its corrective target zone. These levels of resistance are usually crucial in determining if a countertrend can initiate a more substantial reversal. If prices manage to make it above these levels (circa $1157 at present), the Daily trend would turn impulsive and endanger the longer term Weekly downtrend. This is not yet the case.
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Finally, the Hourly chart (right-hand chart), following its January rally, has now reached its Impulsive target zone up (green oval price projection), i.e. this short term upside rally has reached its potential up for now.
Hence, although the Weekly downtrend may seem exhausted, the current consolidation up on the Daily and Hourly charts has almost fulfilled its own potential up. Would it be time, on the contrary, to sell the bounce back into the longer downtrend? As an example we include the situation as of late October, which then led to new lows in December.
Gold Investor’s View as of late last October: “Potential Pullback in a Downtrend”
It is very similar.
And there is another reason that leads us to treat the current rally with caution: Seasonality. Indeed, price fluctuations in Gold are seasonal, a seasonality which is quite regular as it is driven by demand (production is constant). We’ve borrowed the following chart from Casey Research (as seasonality is not our speciality):
We are entering the weakest period of the year for Gold: prices usually start moving up in early summer as investors start to anticipate the Indian wedding period, which culminates in September. Demand is them further sustained through the western Christmas shopping period and finally peaks out with the Chinese New Year (end January / early February). This year the Chinese New Year is held on the 8th of February or next Monday. From a seasonal point of view, Gold should then enter its weakest period of the year.
So sure, the longer term downtrend on Gold may seem exhausted, yet the move up since December is still only a correction and it is nearing its targets. With the seasonal drop-off in Gold prices just around the corner, we advocate caution. Provided, we do not enter financial Armageddon and Gold doesn’t shoot above its Daily corrective target ($1157), we believe it is a wait and see situation, at best.
Disclosure: FinGraphs is a product by Management Joint Trust SA, Geneva, whc offers a system of statistical analysis and automatic interpretations of financial data. All opinions, news, research, analyses, prices or other information in the article are provided as general market commentary and do not constitute financial advice.
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