Gold soared yesterday, likely based on the escalation of the trade conflict between the U.S. and China, but after several hours the rally was over. The tensions didn’t really subside, but the price of gold is already about $10 below the price at which it was trading when yesterday’s rally had started. Is gold trying to say something? No. It’s not saying – it’s screaming.
There is a combination of two factors that makes the current situation particularly interesting and meaningful. The first factor is what we already discussed in the previous alerts – gold’s decline was delayed because new bullish fundamental news kept emerging. We wrote that eventually there would be no new bullish news and that the price of gold would move back to its default mode and resume its decline.
The second factor is that if a given market no longer reacts to factors that should trigger a specific kind of reaction, then it’s a clear sign that the market is about to move in the opposite direction. Yesterday’s session in gold showed exactly that – gold should have rallied, and it did – but only initially. There was not enough buying power to keep pushing gold higher. In fact, buyers were not even able to prevent gold’s decline in the final part of yesterday’s session. Today’s pre-market downswing (gold is at about $1,325 at the moment of writing these words) confirms that the buying power (at least temporarily) almost dried up.
Combining the two previous paragraphs gives us a picture in which gold is not only unwilling to rally substantially based on positive news – it’s not even likely to rally temporarily based on them. It means that both: gold’s next move is likely to be a sizable downswing and that the time for the consolidation is up or almost up.
Before we move to charts, we would like to explain how the market tends to react if it really wants to move in one way (here: decline), but the fundamentals keep interrupting it (here: bullish fundamental gold news – news that’s bullish from the fundamental point of view). We’ll not going to explain a sophisticated econometric model for this and we’ll not going to use terms as first derivative or diminishing marginal returns. Instead, we’ll use a simple analogy to something from real life. It will not be a pleasant analogy, but if it generates any emotions, then it’s more likely that it will be easier to keep in mind.