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Gold: Breakout Or Fakeout?

By Investing.com (Barani Krishnan/Investing.com)CommoditiesNov 09, 2021 03:58AM ET
www.investing.com/analysis/gold-breakout-or-fakeout-200607757
Gold: Breakout Or Fakeout?
By Investing.com (Barani Krishnan/Investing.com)   |  Nov 09, 2021 03:58AM ET
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The saying “once bitten, twice shy” doesn’t apply to gold bugs. 

While it's fairly easy to understand that someone might not try something a second time because of a bad experience the first time around, it’s harder to empathize with the passion of gold bugs, who are bullish about bullion to the point of irrationality. 

That said, with gold turning the corner again and attempting for higher $1,800 pricing, it is incumbent upon the average analyst and investor in the precious metals game to suss out the move to determine if it’s a breakout or fakeout. 

Gold Daily
Gold Daily

All charts courtesy of skcharting.com 

A breakout indicates an upward move that conquers the resistance/ neckline/ selling pressure in gold. And bullion has certainly done that, in a clear snap above the previous $1,700 territory for a fourth day running.

A fakeout, meanwhile, is a market situation indicating an upward move that never materializes, with the opposite happening instead. Gold has done that umpteen times in the past year, often signaling the emergence of higher $1,800 pricing—or even $1,900—before a crash to $1,700 or worse, $1,600 levels. 

There are lots of ideas on where gold needs to get to in order to preserve its current momentum, and I hope to draw a cogent picture from the different variables and thoughts in play.

Firstly on the fundamental front, one reason gold has been unable to live up to its billing as an inflation hedge over the past year is due to incessant hype that the Federal Reserve will be forced into an imminent rate hike to cool price pressures which are increasing at their fastest pace in 30 years.

This speculation is what drove US Treasury yields, including the benchmark 10-year note and the dollar constantly higher over the past 12 months, at the expense of bullion.

The good thing for gold longs is that this chatter has been somewhat silenced over the past week by Fed Chair Jerome Powell, who emphatically assured—again—that the central bank will be patient and a rate hike will only come after the middle of 2022 and most likely toward the end of the year.

Gold Monthly
Gold Monthly

Powell also maintained that the rate hike and the monthly $15 billion tapering of the Fed’s $120 billion-a-month stimulus won’t be tied to each other. That took the wind out of the dollar, which just on Friday hit September 2020 highs. Interestingly, gold has only reached highs of September 2021 since its breakout last week.

And even with a swoon in both the greenback and US Treasury yields, gold still started out softly in Tuesday’s early trade in Asia, hovering at $1,825. That could indeed change by the start of the New York session. The concern for gold bulls though will be the myriad of resistance spikes in their way, each likely to pose a more formidable test in $1,800 territory. 

“The first-off resistance is $1,835 and that needs to be cleared convincingly,” said Phillip Streible, precious metals strategist at Blue Line Futures in Chicago.

“I’m advising my clients to go into options to avoid getting parlayed on the futures. I’m going to need a two-day close of $1,840 and above to tell them to buy.”

Gold Weekly
Gold Weekly

Daniel Dubrovsky, who blogs about gold on DailyFX.com, says that with the break of the $1,813–$1,808 resistance on the 4-hour chart, gold has exposed itself to the $1825–$1834 target—right where it was hovering. 

“The latter is made up of peaks from July,” ​​Dubrovsky wrote.

“A bullish Golden Cross between the 20- and 50-period Simple Moving Averages may form, opening the door to an upward technical bias. These lines may also come into play as key support in the event of a near-term decline.”

Dubrovsky also noted that according to the IG Client Sentiment that he tracked, roughly 66% of retail traders were net-long gold too. 

“Downside exposure has increased by 10.30% and 48.34% over a daily and weekly basis respectively,” he wrote.

“We typically take a contrarian view to crowd sentiment. Since most traders are net-long, this suggests prices may fall. But, recent shifts in positioning are resulting in a bullish-contrarian trading bias.”

Haresh Menghani has a more cautious stance in a blog that runs on fxstreet.com.

“From a technical perspective, last week's sustained break through the $1,800 mark and acceptance above the $1,810 level favors bullish traders,” Menghani wrote.

“Hence, some follow-through strength towards testing a strong barrier, around the $1,832-34 heavy supply zone, remains a distinct possibility.” 

“That said, weakness below the $1,800 mark might prompt some long-unwinding and drag gold back towards the $1,780 level en-route to the $1,770 support zone.”

Sunil Kumar Dixit said the next horizontal and static resistance for the spot price of gold, which he based his forecasts on, was in the $1,833-$1,835 area. 

“Gold's resolve will be put to test whether it succeeds to sustain above this zone,” said Dixit, chief technical strategist at skcharting.com.

He said spot gold’s short-term daily chart showed an overbought state with a Stochastic Relative Strength Indicator of 95/95.

Added Dixit:

“An ability to adapt above $1,835 should be seen as a green signal for readiness to test the next 23.6% Fibonacci adapted at the $1,860 level.”

“Meanwhile, consolidation and correction can cause some limited downtime aiming at $1,810-$1,800-$1,795, which will be a good value buying.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Gold: Breakout Or Fakeout?
 

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Gold: Breakout Or Fakeout?

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Comments (10)
Shane Zhang
Shane Zhang Nov 10, 2021 6:14PM ET
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Fakeout since USD also rally today, lack of confirmation.  Most importantly Gold's 2018-2020 rally does not confirmed by falling USDJPY, USDJPY could be at 75.  Lot of people think corr does not matter any more, but look at DJ Tran it catch up to Dow in one day last weeks.  Also I flip through some chart last weeks maybe the reason why USDJPY stuck range during Gold rally maybe the cycle is 10 years aheads of gold.  As we can see the 2011 JPYUSD look very similar to the current 2020 Gold top.
Nataşa Nataşa
Nataşa Nataşa Nov 10, 2021 6:14PM ET
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Dream and real life dififrent...jpy dead.. Real power china
Phil Kimmel
Phil Kimmel Nov 09, 2021 1:08PM ET
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Fakeout! Gold is without one of the wordt investments possible over the last 30 years. Bitcoin is booming!
Barani Krishnan
Barani Krishnan Nov 09, 2021 1:08PM ET
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Thanks to the nonsense believed by your kind, yes :)
Adam Johnson
Adam Johnson Nov 09, 2021 1:08PM ET
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Gold is a rock and holdover from primitive days. Bitcoin is democracy in wealth that can transfer across the world at the speed of light. The comparison isnt even close - Gold’s going down. Nice article though
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Nov 09, 2021 10:09AM ET
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As stocks sell off, the gold that goes up is sold off to buy the cheaper sold off stocks, As gold comes down and stocks up, again stocks are sold off to buy gold,. .. this rotation madness continues until stocks fall so fast in big chunky lumpy droppings that gold spikes on safe haven buy .... and so on
Gervais Christopher
Gervais Christopher Nov 09, 2021 9:41AM ET
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How can 'Gold Bugs' be 'irrational, when all Central Banks have devalued their currencies over 5 fold in the last few years?
Barani Krishnan
Barani Krishnan Nov 09, 2021 9:41AM ET
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Irrational basically means refusing to see rationale and in this context, it's the combined forces of the Fed and other manipulative forces determined to keep gold down and the dollar/fiat artificially popped. So, it's not really a bad thing; of course it's difficult to understand from the perspective of one who's neutral/bearish gold. Hope that explains and bests.
Pi Fo
Pi Fo Nov 09, 2021 8:14AM ET
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Bitcoin is the new gold.
SunilKumar Dixit
SunilKumarDixit Nov 09, 2021 8:14AM ET
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Pi Fo. Bitcoin is Bitcoin. Gold is Gold. Nothing is going to change its shine. Even Bitcoin had to borrow its golden shine from Gold 🤣👆
Barani Krishnan
Barani Krishnan Nov 09, 2021 8:14AM ET
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SunilKumar Dixit  So true, Sunil. It's bit faux (actually a lot of faux :) )
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Nov 09, 2021 7:56AM ET
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Gold, USD, yields, and Stocks are always playing who blinks first game. This time stocks will blink first by going down, taking yields and USD down for gold to lift off to 1960+. Yes. risk exists always in trading. good luck
SunilKumar Dixit
SunilKumarDixit Nov 09, 2021 7:56AM ET
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MuraliKrishna Brahmandam. Agree with your observations. Stocks overvalued beyond the clouds.
Barani Krishnan
Barani Krishnan Nov 09, 2021 7:56AM ET
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SunilKumar Dixit  Yes, Murali is right on this score.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Nov 09, 2021 6:50AM ET
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1760 was the fakeout. Be ready for the 1960 kiss
SunilKumar Dixit
SunilKumarDixit Nov 09, 2021 6:50AM ET
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MuraliKrishna Brahmandam. Yes. This time indicators are signalling up move. However, the markets are full of surprises.
Barani Krishnan
Barani Krishnan Nov 09, 2021 6:50AM ET
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SunilKumar Dixit  I am thinking that any build that comes will be a slow burn, Sunil -- unlike the March-Aug 2020 acceleration.
Puskar Thapa
Puskar Thapa Nov 09, 2021 6:08AM ET
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Gold flying higher and higher I am on a buy side
SunilKumar Dixit
SunilKumarDixit Nov 09, 2021 6:08AM ET
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Puskar Thapa. Odds are in favor of Gold heading north. Still we would like to see Gold taking out 1840 for better affirmation.
Barani Krishnan
Barani Krishnan Nov 09, 2021 6:08AM ET
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SunilKumar Dixit  The stars seem aligned for the longs -- at this moment, at least.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Nov 09, 2021 5:30AM ET
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They are passionate dear writer because of two reasons; first they understand that there is a reason behind calling metal a metal, paper a paper and bubble a bubble, second they do understand that when this system catches its fate it’ll no longer be a paper monetary system after that day, and for sure not a bubbly one - the bubbly part is about the crypto bubbles the system trying to convince people that it could be value- :)
SunilKumar Dixit
SunilKumarDixit Nov 09, 2021 5:30AM ET
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Abdelraziq. I do agree with you on Crypto bubble notion and significant value of the physicals.
Barani Krishnan
Barani Krishnan Nov 09, 2021 5:30AM ET
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Brother Abdelraziq, welcome, yes. That was just a description of the innate qualities of a gold bug. All said, passion is sometimes as important to a trade as logic. A good analyst I know says: Markets can remain irrational longer than you can stay solvent :)
Abdelraziq Abuaisha
Abdelraziq Abuaisha Nov 09, 2021 5:30AM ET
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I don’t know much about time, but I do know how economic factors interact and react. If it’s only about me I wouldn’t write on this place nor any other, it’s about the harm everyone on the planet suffers from, because your Fed Chair kept restricted to some policies that help no one, at the short run it kept something he believed in alive, at the short run it caused inflation, we see the savings of people now being burned to ashes and we see the price of food and other basic material rising insanely. That made believe in the very deep side of me that this system has no good to offer, good will come when we start to think in others more and work for others more, which cannot be accomplished as long as this system exists.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Nov 09, 2021 5:30AM ET
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At the long run*
Barani Krishnan
Barani Krishnan Nov 09, 2021 5:30AM ET
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Abdelraziq Abuaisha  True, I'm with you on that. Bests, brother.
Mukhtar Mirza
Mukhtar Mirza Nov 09, 2021 5:20AM ET
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Thanks a lot for a comprehensive post for gold
Barani Krishnan
Barani Krishnan Nov 09, 2021 5:20AM ET
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You're most welcome, Mukhtar.
 
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