It is important for precious metals investors to periodically review longer-term perspectives for the market. Gold had a strong finish for the holiday-shortened week, rising 1.2% or nearly $16 to close at $1,298 as of the final trade on the New York COMEX on Friday afternoon. However, as discussed last week (https://bullionexchanges.com/blog/2019/01/21/all-time-high-gold-volume-what-it-means-for-investors), we expect gold to be encountering a significant level of resistance now as it approaches the key $1,300 region, in the form of sellers who had previously bought at the 2018 peak in the same region.

Where does that leave gold with an eye for long-term trends?  Let us discuss some of the major technical levels which gold is respecting, and what price levels gold investors should focus on over the year ahead if, as we believe, a retracement from the present region is soon to begin.

 

Long-Term View

Below is the two-decade view of gold, from the bottom in the year 2001 at $255 per ounce through present:

The most important consideration for long-term investors is to observe that gold has been within a basing process (labeled in blue) since the year 2013. Basing is a term that describes price action which moves in a series of waves, higher and lower. Yet which as a net sum results in a minimal overall change.

From 2013 through 2019, gold has been basing between the mid-$1000’s and the low $1,400’s. This is quite a wide range, yet it is still basing in nature. For example, gold also traded at the present level near $1,300 during early 2013.

It is key for investors to recall the technical adage: “The longer the base, the stronger the move.” What this means is that, although a basing process can be wearing on the patience of investors, it is actually a healthy process for a market throughout time.

Why?

 

Mechanics of a Base

Let us think about what is happening during a long-term base. Individuals, institutions, and central banks each buy and sell, over and over again, at various intervals throughout the sideways-type price movement. Those who no longer want to own gold, sell. And this gold is bought by new investors who desire the metal. Slowly but surely, gold is transferred from “weak hands” to “strong hands”: those who desire to own gold into the future.

A basing process represents the steady transference of gold to new ownership, and it is a healthy long-term pattern. This is why, although we may be cautious on gold over the short-run, the long-term pattern is shaping up with increasing positive expectations.

What happens toward the end of a basing period is that – once sufficient transference of ownership has occurred to strong hands – when the next significant group of buyers emerge, there is not enough bullion available for them to purchase within the basing price range. What must then occur is an upward revaluation in price, to encourage some of those stronger hands to depart with their gold, as demanded by the new class of buyers.

We cannot predict ahead of time what event will cause a new class of buyers to force the basing process to break. It could be a depreciation in the US dollar or another world currency. Or potentially be a crash in one of the world’s stock markets. Maybe even be a geopolitical event or war.

However, what we can observe is the health of the basing process. Again, this range-bound price movement has been happening between the mid-$1000’s and low-$1,400’s since 2013. Metal is being slowly transferred from former holders to new owners.

Levels to Watch on Retracements

Given that any decline which may unfold throughout the rest of this year will still be part of this larger basing process, what are some levels to monitor that gold may find support?

Let us refer again to the chart. Note the dashed-magenta colored line, which now comes in near $1,200. This trend began all the way back in 2001, and served as resistance through 2005. In early 2006, a new series of more aggressive buyers entered the gold market. This caused the break of the trend (red highlight). Note how the now-broken trend then acted as support during 2006 in the $500 region, again during the Crash of 2008 at $680, and again during the 2015 low at $1,045.

What is critical is that this same long-term trend acted as support just below $1,200 back in August. In other words, buyers are emerging at higher and higher intervals along an established trend every several years.

Again, this trend now comes in near $1,200. And so if gold were to back off from present prices, this is the logical area of support that the market will test. We will want to see this level hold. Or else the next observable area of buying interest does not exist until the low $1,100’s. Thus, corresponding with the 2016 bottom.

The Power of a Base

The odds favor a retracement back into the low $1,200’s, which will represent a solid buying opportunity for long-term investors.

Whether or not this region holds as support, the longer-term pattern above $1,000 is one of an extremely healthy base that has been unfolding since 2013.

Metal is being transferred from weak to strong hands at every twist and turn throughout this 7-year base. Let us try to buy on dips, but always remember: “The longer the base, the stronger the move.”


CHRISTOPHER AARON
BULLION EXCHANGES MARKET ANALYST

Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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