Over the last 48 hours, the gold market has shown signs of life despite the fact that we had been in a significant downtrend. At this juncture, we have to ask whether or not we are starting to form some type of bottoming pattern. We are on the precipice of making a large decision here as to the future of the gold market trend.
Gold has Multiple Influences Currently
Ultimately, when you look at the gold market, you cannot look at it in a vacuum. There are a lot of things going on at the same time. For example, the United States dollar strengthening is not helping gold by any stretch of the imagination, but ironically, this is happening while interest rates are falling and people are betting that the Federal Reserve is going to raise rates twice this year. In other words, the bond markets seem completely disjointed from the currency markets at the moment. Sooner or later, we will have to resolve this situation.
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This behavior is a little bit difficult to get a grasp on, so more likely than not, we will probably have to pay close attention to whether or not we can pick up momentum from the crucial $4,000 level. So far, it has held pretty steady, but a bounce from here may just lead to more resistance above, as the trend has been so strong to the downside as of late.
Technical Indicators and Alternative Market Scenarios
The next couple of sessions could be rather important, and I do think that at the moment we are in the middle of trying to determine whether or not this market is finding a bottom, or if it's just bouncing a bit from previous support that it will ultimately break through. The overall consensus for gold is that it should continue to fall, at least if you've been listening to people over the last couple of months, but longer term, if inflation becomes an issue, sometimes that can help gold.
Furthermore, the central bank to watch will be the Federal Reserve. If the Federal Reserve does not start hiking rates and the US dollar starts to drift a little bit lower, that certainly can help gold. This is a possibility that I'm watching, and it is worth noting that on a couple of pairs at least, the US dollar looks a little extended. If there is some kind of reversion to the mean, it could help the gold market try to recover from the recent selling pressures.
US Dollar Remains Important
The question at this point is going to be whether or not that momentum to the downside for the dollar and, conversely, the upside for the gold market can continue. The alternative scenario is that the US dollar continues to strengthen, and that does weigh upon gold. A collapse below the $4,000 level could open up a massive drop to the $3,500 level if we continue to see traders run to the greenback, as the US dollar has been so favored over the last several weeks.
At this point, the most important thing to watch, I believe, is the $4,000 level, but I would also watch the $4,200 level. Signs of exhaustion in that area could show that the market is rolling over again. For what it's worth, the 50-day EMA is starting to reach towards the 200-day EMA; we'll just have to see if the so-called death cross kicks off as well. The next couple of days should tell the story for the next couple of weeks if things play out how I see them at the moment.
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