A battle between gold bulls and bears is taking place just below year highs and the upcoming Jackson Hole Symposium could be the catalyst for a big move.
Record Futures Demand And ETF Outflows
Last month, we witnessed record demand for gold futures. Of course, the sabre rattling between the US and North Korea was a key driver behind this, but dig a little deeper and a curious dichotomy is apparent. That’s because, in the same month, we also saw significant outflows in gold-backed ETFs.
The difference between gold futures and gold-backed EFT demand can be explained by hedge funds and market speculators favoring futures and longer-term funds and retail investors favoring ETFs. Nevertheless, as the below chart indicates, gold is clearly setting up for a big move.
Trapped Below Resistance
Before focusing on this week’s price action, let’s set the scene a little. First, we highlight that a resistance zone around the 1,295 mark has formed overhead, which coincides with the April and June swing-highs. Gold prices faltered at this zone on August 11 and broke to 1,300 only to rollover and close at 1,284 on August 18 — a clear false break of resistance — further reinforcing the significance of this zone.
However, with gold locked in a well-established uptrend since July, we now find prices trapped between a resistance zone overhead and a well-established medium-term trend line. Given this, the intense price compression witnessed over the past few sessions should make investors sit up and take note.
Double Inside day
As the chart highlights, this week sees gold prices coiling within a series of ever tightening trading ranges. Both Wednesday’s and Tuesday’s trading ranges were fully engulfed by the previous day's candle, forming a ‘double inside-day’ pattern. In fact, if we see prices close at their current level, we'd see a triple inside day pattern form.
Price compression patterns like this are very rare and indicate that a bout of powerful range expansion is to come.
Wait For Breakout Confirmation
For us to move long we would need a decisive break and hold above 1,295. A break and hold above a well-established resistance zone would offer a sure sign of bullish momentum and in this instance, we would have short-term momentum aligned with the July/August uptrend. Moreover, with Yellen speaking at the Jackson Hole Symposium on Friday, a potential catalyst for investors to flow into safe-heaven assets like gold is just around the corner.