The Price of Gold Is Falling, but These Technical Indicators Point to an Upcoming Rally

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Last week was a rough one for the price of gold, and you don’t have to look far to figure out why.

The U.S. 10-year Treasury bond rose back above 3% to reach 3.05% on Tuesday (May 15), the highest it’s been since 2014. It went even higher over the next couple of days, spending the rest of the week above 3%.

That, in turn, pushed the dollar higher, with the U.S. Dollar Index (DXY) reaching well above 93, testing 93.5, and then reaching to 93.8 on Friday.

price of gold

Of course, gold prices reacted as expected, selling off hard as Treasury yields and the dollar jumped.

But an end to this gold price correction may be near, and I’ll tell you why. In fact, what was old support may soon become the new resistance for the dollar.

Before I show you the technicals that indicate a coming rally, here’s how the price of gold is trending now…

How the Price of Gold Is Trending This Week

Gold was doing just fine on Monday, May 14, bouncing along around $1,320, until the dollar began a rally that would take it through the entire week. The DXY bottomed at midday around 92.25, then consistently climbed through to Friday, when it reached 93.70 by late afternoon.

As you’d expect, gold took that hard and dropped on Monday to $1,313. But another push higher in the DXY on Tuesday, to 93.20, along with the U.S. 10-year Treasury surpassing 3%, would shave $20 off gold prices, leaving the yellow metal trading at $1,290.

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But even as the DXY continued to climb the rest of the week, gold managed to consolidate in the $1,286 to $1,293 range, ending on Friday at $1,292.

Here are the DXY and S&P 500 for perspective last week.

price of gold

 

price of gold

So given how bonds, the dollar, and gold reacted, let’s look at some related charts to see if we can glean some sense of what may lie ahead.

Here’s exactly where I see the price of gold heading now…

What’s Next for the Price of Gold in 2018

Competition for gold comes in many forms, but 10-year Treasuries and 30-year Treasuries are definite contenders.

Gold prices

You can see the push by the 10-year yield in the past month would be a challenge for gold.

Ditto for the 30-year yield.

Gold prices

Both of these have enjoyed tremendous rises since the start of the year. A pause at this point would certainly not surprise me.

As for the dollar, the upward action has been concentrated in the last month.

Gold prices

Here, however, we’re seeing the dollar having spent about three weeks at or near overbought levels.  Of course, the dollar could push higher after losing so much to other currencies since the outset of 2017.

But as the DXY approaches 94, remember that was its support level for much of 2015 and 2016.  The strong rally of the past month is a whopping 5.3%; a gigantic move for the world’s reserve currency.

If the dollar stabilizes here or falls back somewhat, we’re likely to see gold pop, perhaps substantially.

Gold prices

While gold could become more oversold before bouncing, the last time its RSI indicator was this low was mid-December. And it rallied by over $120, or nearly 10%, at the time.

I’m not saying that’s a certainty, but it’s a possibility. If you look at the last two times gold dropped below its 200-day moving average, it didn’t stay there for long.

Gold prices

I don’t think there is too much downside risk for gold at this point, though we could still see $1,270 to $1,280 if the DXY hits 94.

As for the latest Commitments of Traders report, large speculators are near one of their smallest net-long positions since January 2017. That’s a great contrarian indicator that sentiment is bottoming out.

Consider that a 10% rally would pull gold up to about the $1,400 level, a threshold I’ve been expecting gold could challenge by this summer.

 

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