We have been bullish on gold prices throughout the last year. During this time our clients have made some great trades in gold stocks such as Northern Star Resources (ASX:NST), Evolution Mining (ASX:EVN), St Barbara (ASX:SBM), and Silverlake Resources (ASX:SLR), to name a few.
The gold price
The gold price hasn’t moved much in the last few months though. In January, gold prices moved to within a whisker of the 2016 highs near US$1370 (horizontal blue line). However, since then, the gold price has failed to break through. Is this as a sign of weakness? You would be correct in assuming that this is not actually the case. When the price of a share or commodity falls short of a previous high, that is not necessarily a sign of weakness. If gold suffered heavy selling in January, then it would be a concern. Because the gold price has held in here, under the previous high (circled), it is actually a sign of strength.
Why is this bullish?
What is really happening here? Sellers are hitting the gold price up here but it is getting met by the buyers. This is why the price cannot fall lower. If, or when, that selling has finished, gold will have a clear road ahead of it to smash through that $1370 resistance level and stage a strong rally. This congestion under a previous high can be a strong trading signal. I have highlighted this pattern in the past with a number of stocks (BHP being a notable example). It can be a very powerful pattern and it is worth understanding.
At the moment we need to see the price of gold convincingly push through that US$1370 level. If it can do that, then we have minor resistance up near US$1465 and then major resistance up at US$1560.
Michael Gable is managing director of Fairmont Equities.
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