Gold Nears Major Resistance Ahead of the Fed

Commodity traders and other aficionados will be watching gold closely after Wednesday's Federal Reserve interest rate decision to see if the yellow metal can add to impressive gains that have stretched nearly 12% since August 2018. This buying impulse has now reached within four points of major resistance in place since 2013, with a breakout setting off the most potent buying signals since the start of the decade.

Gold bugs have the Trump administration to thank for the uptrend, with the president's relentless attacks on Fed Chair Jerome Powell forcing the central banker to reconsider an aggressive fiscal policy that initially scheduled at least four 2019 hikes. That number has dropped to two, according to the futures market, but benign inflation numbers and volatile world markets could send the number back to zero in the coming months.

The Fed also has to consider that surging wage gains and inflationary pressures just haven't happened in an odd economic cycle that will soon stretch into its second decade. However, trade wars could ruin gold's bullish outlook, with commodity inflation skyrocketing due to higher costs while forcing the Fed to reinstate aggressive rate hikes. For now at least, optimism about a China deal is riding high, allowing this unique financial instrument to climb the slope of hope.

GLD Long-Term Chart (2006 – 2019)

The SPDR Gold Trust (GLD) ended a modest uptrend at $72.26 in 2006 and pulled back into the mid-$50s a few months later. It broke out above range resistance in 2007 and reversed at the psychological $100 level ($1,000 on the underlying commodity), dropping into a test of new support during the October 2008 crash. That marked a historic buying opportunity, ahead of a powerful trend advance that lifted into the triple digits in the fourth quarter of 2009.

The uptrend finally ended in September 2011, yielding a descending triangle top, with horizontal support near $150. Keep that level in mind because it now marks the logical upside target if gold can break multi-year resistance in the coming weeks. It broke down in 2013, entering a steep downtrend that eased into a descending channel a few months later, and continued to post lower lows into 2015's six-year low at $100.23. 

A bounce into 2016 stalled above $130 at the .382 Fibonacci retracement level of the three-year decline, printing the highest high in the past two and a half years. Price action since that time has held within the boundaries of the 2015 into 2016 trading range, denying profits to both bulls and bears, while minor rallies have carved a trendline of lower highs that now marks major resistance. The latest uptick has now reached within four points of this barrier, raising hopes for a breakout.

GLD Short-Term Chart (2015 – 2019)

Price action has been contracting since 2016, with higher lows and lower highs similar to a triangle pattern. This loss of volatility is typical at the end of a long-term downtrend and could be signaling that the time is right for the yellow metal to bust out of the long-term range in a trend advance that pleases long-suffering gold bugs. However, there's no advantage in taking early exposure because a lot of things can go wrong between now and then.

The on-balance volume (OBV) accumulation-distribution indicator confirms growing bullishness, lifting to the highest high since April 2013. It's now situated just above 2016 and 2018 peaks that printed during the past two trendline reversals. Given this structure, it makes sense to watch the indicator closely if the rally surges into resistance, looking for telltale buying or selling pressure that generates an early signal for a breakout or another downturn.

The Bottom Line

Gold is approaching trendline resistance going back to 2013, setting the stage for a key test that could trigger the strongest uptrend since 2011.

Disclosure: The author held no positions in the aforementioned securities or underling commodities at the time of publication.