In the eyes of many veteran traders, gold has been an absolute disappointment as an investment over the past 12 months.
With inflationary pressures on the rise and US economic policies on a path that put the US dollar’s status as the world’s reserve currency in jeopardy, paper gold prices (measured here by the SPDR Gold Trust ETF (GLD) should have returned far better than the -4.0% and -5.6% returns that have actually transpired over the Y-T-D and 1-year periods, respectively.
One school of thought for the underperformance that actually makes a lot of sense is that paper gold’s lackluster performance is due to a major demographic shift in the market.
Specifically, the proliferation of a new, younger breed of traders that have embraced digital assets (namely cryptocurrencies) not only their FOMO aspect, but also for the role they now play to shield peoples’ money from the inflationary pressures caused by the global race to devalue fiat currencies.
From a trading perspective, however, a major technical development took place for paper gold prices in August, and it demands our attention for the possible bullish implications it may hold.
When we think about gold prices, perhaps the most important factor to consider is price action in the US dollar.
As traders, we tend to get caught up in the short-term market swings that can lead us to quick, exciting opportunities to profit.
When it comes to assets like gold, however, we must also think in terms of the long-term, macro side of things, as this will shape the lasting trends that traders should be chasing.
That said, many experts predict that the dollar’s decline is inevitable because of the US government’s economic policies that have caused debt levels to explode.
With no end in sight to the rapid rise to debt-to-GDP levels here in the US, this is a scenario that should, in theory, keep gold prices elevated.
The price of paper gold “hammered” higher in August
While gold and gold stocks may not interest you as much as the crypto universe does, as a trader you must be able to identify when cycles have become stretched so far in one direction that other, less popular areas of the market may be setting up to outperform your favored sector or industry.
That’s precisely what the monthly price chart of gold is suggesting may be the case, after August’s price action generated the bullish “hammer” shown in Figure 1.
These bullish reversal patterns are excellent at signaling when an important shift in psychology (from bearish to bullish) has occurred, and when these reversals occur on the monthly charts, they demand even more attention.
Once these monthly reversal patterns develop, it behooves traders to start looking more closely at the area of the market where they formed.
As Figure 2 reveals, the rally has been so strong that GLD may not look back from here, at least for the short-to-near-term.
Specifically, Figure 2 shows that GLD not only exploded from a “bull flag” pattern this past week, but its RSI momentum indicator also pushed above the all-important 60 level.
As a quick reminder, RSI is the level above which bullish escape velocity is achieved.
Longer-term, though, there is still a lot of work for gold prices to do before it can be said that the yellow metal looks poised to start trending to fresh all-time highs as an inflation hedge.
This workload is shown on Figure 3 below, where GLD can still be seen trading below the trend of lower highs and lower lows originating at the all-time highs of August ‘20.
This brings me to my final point, which is that while GLD’s bullish August “hammer” candle pattern can be viewed as a signal that a major turning point may be in the making, this is a big-picture signal.
This means that, until GLD starters establish a new long-term uptrend above the post-August ‘20 downtrend shown above, traders must be ready for the possibility that price action will remain volatile over the weeks ahead.