If the latter part of 2016 was one to forget for gold bugs, the start of 2017 has certainly been one to remember with the precious metal finally finding some much needed bullish momentum. Gold's recovery, which has seen it move off the late 2016 lows and the $1130 per-ounce area to currently test the $1300 per-ounce range, has been driven by three distinct and very different forces.
First, of course, is the impact of the US dollar, which continues to trade with an increasingly bearish sentiment on the slower time frames, as Fed disunity, coupled with disbelief from the markets and statements of a weaker dollar from Trump, have all helped to weaken the currency. But as always, one man’s loss is another's gain as it is for gold and its relationship to the US dollar. Second comes a flight to safe haven and with tensions rising in the South China seas, gold is likely to continue to move higher driven by those seeking hard-asset safety. Finally we have the inflation effect and whether the US economic data accurate, rising interest rates will ultimately signal rising inflation, which will impact gold as buyers move in as a hedge against inflation.
From a technical perspective, and in particular considering volume price analysis on the weekly chart, what was perhaps most pertinent was the price action of November and December. This was characterized with seven weeks of falling price action, accompanied by generally falling volume in contradiction of Wyckoff’s third law. We should have expected to see rising volume in a falling market, confirming the move lower as it takes effort for a market to fall as well as rise. While this period was also subject to the seasonal effect, nevertheless the move lower lacked conviction and big-operator participation with the bearish trend finally bottoming out in the $1130 per-ounce area. Come the new year, bullish sentiment prevailed with rising volume supporting the initial move higher in January with February’s price action taking gold back to the volume point of control at $1262 per ounce as short-term weakness was replaced with bullish sentiment from mid March and supported once again by solid price action and associated volume.
Congestion Ahead
The problem now is that gold is approaching two deep areas of price congestion on the weekly chart. The first is immediately ahead and indeed straddles the VPOC itself with the ceiling of resistance marginally above $1300. If that's taken out, the next region extends from $1320 to $1400 — last seen in the summer of 2016. So volume will be key to the development of the bullish trend for both these regions to be punctured and if for that to happen, we'll need to see strong and well developed price action coupled with strong and rising volume.
For the time being, we're trading at the volume point of control and may expect to see a period of consolidation — North Korea not withstanding. But based on the two technical levels outlined above and if both are taken out, gold bugs may be cheering long into the summer on further solid gains for their beloved metal.