Is gold ready for a pause technically?

We often discuss the fundamental drivers of gold as being a function of economic expansion, risk and uncertainty, opportunity cost and momentum.

Given the recent increase in gold pricing to new all-time highs in US dollars, it is relevant to discuss the current momentum of gold within the context of tactical positioning; specifically, the impact of technical indicators on the price of gold.

Market technicians focus their time on identifying chart patterns and their implications on future prices. This is certainly a component to commodities’ price behavior and gold trading in particular.

With the recent surge to all-time highs, gold completed a bullish “cup-and-handle” formation which began in March of this year, through its recent breakout. The “cup” formed as the price of gold sold off during the early part of the COVID crisis and completed the “cup” as gold rallied after central banks cut rates and began their most recent rounds of economic stimulus.

The subsequent “handle” or period of time with minimal price movement left gold near $1,700 for the better part of the past three months. Over the past month, gold broke out above $1,700, while reaching over $1,950, or the projected price based on the technicals.

Source: World Gold Council, Bloomberg

Generally speaking, a market technician will measure the distance from the bottom of the cup to the handle, in this case approximately $1,450 to $1,700. The projected price is generally that difference added to the price of “the handle”. In this instance, the $250 depth of the cup suggested a technical price move of $1,700 to $1,950, precisely what occurred recently.

Another technical indicator, the relative strength index (RSI), measures the magnitude of price changes to overbought or oversold conditions. This number oscillates between 0 and 100 with numbers above 70 overbought and numbers above 80 extremely overbought. The oversold conditions of an RSI near 30 in March preceded the recent 14-day RSI (the most widely used time horizon) of 88, suggesting gold could be overbought in the short term.

Source: World Gold Council, Bloomberg

Finally, historical high and low prices, particularly all-time prices, often act as a point of resistance or support, sometimes based on a behavioral bias from investors.

Gold remains an important long-term strategic component to portfolios for a number of reasons. Elevated stock valuations, easy money, low rates, geopolitical risk, and of course, the uncertainty about the long-term COVID impact are all reasons to have exposure to gold. And these are some of the reasons it has been one of the best performing assets in 2020.

Technical analysis remains just one of the many “tools” in the investment toolbelt and market pricing sometimes ‘ignores’ patterns. However, in the short term, many of the aforementioned technical indicators suggest gold could, at the very least, pause from its year-to-date run of 27%.