Gold Price Cup and Handle Pattern Points to a Bullish Breakout
Gold price is down for the second straight day and month as investors continue to digest the recent performance of the bond market. They are also reacting to the latest statements by Jerome Powell, the Fed chair.
Gold has been pressured
The price of gold has been under intense pressure in the past few days. After reaching a record high of $2,075 in August, it has been in a slow downward trend. It has dropped by more than 13%, while other assets like gold and cryptocurrencies have reached an all-time high.
The ongoing weakness has happened at a time when the US dollar has also been struggling. The dollar index has fallen by more than 12% from last year’s high of $103.20.
In the past few weeks, the gold price has fallen even as investors have started to brace for inflation. They believe that the upcoming $1.7 trillion stimulus package will supercharge the economy and push inflation above 2% in the past few months. This has pushed the short and longer-dated US government bonds to the highest levels in more than 12 months.
Further, the gap between the yields of the 5-year and 30-year government bonds has risen to the highest level in more than five years.
As such, the ongoing weakness of the gold price has been a bit controversial. For one, most investors who buy gold do so because of its role as a hedge against inflation. The theory goes that the price would rise in a period of high inflation.
Notably, the gold price rose by more than 20% in 2020 at a time when the overall inflation in the United States was below 1%.
Bitcoin and gold prices
Therefore, there are two possible reasons why gold has underperformed. First, most investors have been focusing on Bitcoin, which is often seen as a digital version of gold. This year alone, the price of Bitcoin has more than doubled as more institutions buy it. Tesla has already bought BTC worth $1.5 billion, while inflows into the Grayscale Bitcoin Trust have soared to more than $32 billion.
Gold ETFs have seen increased inflows, although the pace has been relatively slow. According to the World Gold Council, gold ETFs saw inflows of about $1 billion last month. This was just a 0.4% increase.
Second, the gold price has struggled because of the potential for the high interest rates. Analysts believe that the new stimulus will push inflation to above 2% later this year. This will, in turn, lead to higher interest rates and possibly a strong dollar. In theory, gold has a negative relationship with the US dollar.
However, in a testimony on Tuesday, Jerome Powell said that the US was having an uneven recovery. As a result, he said that the country still needed more fiscal and monetary support. Also, a few months ago, the bank committed not to hike interest rates even after the average inflation rose to 2%.
Gold technical outlook
Gold has struggled in the past few months. However, looking at the monthly chart below shows why. As you can see, the price reached a high of $1,972 in 2011 and then retested this level a few months ago. As a result, the price formed a cup and handle pattern. The recent weakness seems to be part of the handle.
Therefore, the price will likely rebound in the next few months. If this happens, the next key level to watch will be $2,200. However, a drop below the 23.6% retracement level at $1,500 will invalidate this trend.