The Fed Unnerves Gold Market

In my December Market Roundup webinar, I touched on the idea that the economy had begun to seriously slow down. Wednesday’s Fed action, actual and potential for next year, will amplify that process. The equity markets are obviously paying attention, but the increased probability of higher rates and a weakening economy have also affected the technical structure of the gold market in an important way.

Chart 1 shows that the Gold Trust ETF (GLD) rallied to its 200-day MA, but could not get past it. To make matters worse, an abrupt reversal sent the price back below its breakout trend line, strongly hinting that the breakout will prove false. Confirmation would take place should the price drop below its 50-day MA and small red uptrend line. Also, Wednesday’s price action represents a bearish outside day, where the trading range totally engulfed Tuesday’s range. The KST is still positive, but the expected weakness from the outside bar suggests that the upside momentum required to propel the KST higher will not be available.

Chart 1

That’s also the view we get from the VanEck Vectors Gold Miners ETF (GDX). Here, the price action was even more spectacular. First, it was unable to hold above the breakout trend line or the 200-day MA, both of which signal short-term exhaustion. Second, Wednesday’s action totally engulfed both Tuesday’s range and those of the five previous sessions. Finally, we judge the significance of an outside bar by its width, because a wide trading range reflects the intensity of the battle between buyers and sellers. This is a very wide bar indeed. Another measure of intensity comes from volume. Wednesday’s volume was pretty heavy, indicating that sellers are very much in control of this market.

Chart 2

We see similar, but less dramatic price action for the Silver ETF (SLV) and that of silver shares (SIL). Chart 3 shows that the SLV broke above its breakout trend line but was unable to hold. This is clearly not as dramatic as in the case of the GLD, but a moderately overbought and peaking MACD does suggest vulnerability.

Chart 3

Chart 4, featuring the SIL, tells us that the false upside breakout above the green trend line was confirmed the same day by a small breach of the red uptrend line. Note how sensitive the price was to an overbought condition in the RSI. This is a bear market characteristic.

Chart 4

Notwithstanding a small period in which Wednesday’s losses are digested, all of the signals described above are of a short-term duration. However, they take on added importance as the gold price has rallied back to the extended trend line and towards its 12-month MA - a critical chart point, as shown in Chart 5. Since prices look vulnerable over the next 2-3 weeks, any attempt on this overhead resistance is likely to fail. We are more likely to see a test of the August/October lows, as this bear market rally looks as though it has run its course.

Chart 5

Good luck and good charting.
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.