Will Inflation Finally Give Gold Lift It Needs?

Gold Monthly Chart.

There is much talk of inflation at present, and should it materialize as envisaged by the Fed in 2021, then one of the longer-term beneficiaries will be gold. Since the explosive rally higher during the early part of 2020, gold has been wallowing in congestion as a result of August’s long-legged Doji candle. This candle marked the end of this rally, which had taken gold to a high of $2,100 per ounce before pausing at the $1,800-per-ounce region. The question now is whether the long-awaited rise in inflation will occur given the recent rally in soft commodities prices for staples such as wheat, corn and soybeans resulting in the inevitable pull through in food prices will help to give gold a much needed boost.

If we consider the monthly chart for gold from a technical perspective, there are some encouraging signs to suggest gold is indeed building a platform of support in the current area, so a move higher is likely to follow. Why?

First, consider the volume associated with the move lower from August to November and note that while the price of gold was falling, so was the associated volume. In December we saw what could be considered a two-bar reversal. Moreover, the selling that occurred in January was supported with buying. In other words, buyers stepping back in. And while it is too early to say how February’s candle will close, so far the market appears to be finding support at the $1,800-per-ounce level once more.

In addition, and despite the current pullback, the trend monitor indicator for NinjaTrader continues to remain blue and has yet to signal any pause or reversal. So for gold bugs, it is now a question of waiting for those signs of inflation for which gold then becomes the natural safe haven and hedge.