Gold might not be ready to rally just yet

Last weak gold was trying to break its famous multi-month long resistance trendline (see below) and many gold bulls/bugs were getting excited. Over a long term I think gold is a great store of value, but in short term I wouldn’t be surprised if it sells off from the current price level. 

Let’s dive straight into the gold chart. The mentioned resistance trendline is the red line which you might have seen many times recently. Not only the price weren’t able to break above successfully, this Wednesday bulls got another attempt to get the price higher but failed miserably. gc

We see that there is a very strong resistance lying just above the current price, or more specifically between 1300 and 1350 price level in dollar terms. So before we get a weekly close above 1300-1310, it is hard to construct a bullish case if you ask me.

Some people might say but the price is just above the rising trendline in green. It is, but the resistance at current levels is stronger than the support, so the path of least resistance should be down rather than up. Let me present more evidence to build a short term bearish case.

Next chart I want to show you is equally weighted silver and gold price. The chart looks very similar, but weaker than the chart above. Again, so much overhead resistance above the current price.gc_si

The next chart shows gold in euros. This one looks the weakest of them… bulls better hope the price does not break the rising trendline and the price is dangerously close right now.. gc_eur

Now, I also want to show you gold to siver ratio. Let me plot gold vs the ratio side by side to see the relationship. Usually when gold is stronger than silver (the ratio is trending higher), gold price is falling and the opposite is true when gold is weaker than silver. We can clearly see this from the chart below. On the upper chart is gold and on the lower chart the ratio. It looks that the path of least resistance is up for the ratio.gc_gcsi

And let me finish with the recession argument. People are saying that gold is an insurance against the downturns. This generally might be true, but usually when equities start rolling over, so in the first phase of a bear market, gold price tends to fall as well. Just later is when the gold starts catching a bid. So, tell me.. are we over the first phase yet? No. So, even if we start topping in equities in short term, which I don’t think is very likely, gold should fall if historical patterns confirm once again.

To summarise, while I think gold might go up over a long term, there is a risk that gold sells off in the short to mid term and until we break above 1300-1310 price level in dollar terms, it is hard to construct a bullish case.

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