Interactive Investor

Chart of the week: how to play a predicted gold price rally

20th September 2022 13:22

John Burford from interactive investor

Selling has been intense the past six months, but a key indicator has hit a level where previous readings have signalled major advances. Analyst John Burford explains.

Is it time to buy the gold miners?

The precious metals (PMs) are having a torrid time – and no wonder, when interest rates are climbing and many expect a global recession soon. And with the metals priced in US dollars, the currency’s well-publicised strength has been an additional headwind. But are conditions set to change for the better soon?

Yes, there seems little reason to be bullish on the PMs or the miners on the face of it. And that is reflected in the mostly lack of investor interest in US gold mining shares. And I note that the mainstream media has gone very quiet on PMs – so is this relative silence a clue that the bear trends are coming to an end?

Gold has fallen off its $2,075 all-time high in March to this week's $1,655 low – a loss of $420 (20%). In that time, the US Dollar Index has appreciated by 15%, making the loss much less severe when measured against the euro, for example.

In the six-month gold bear trend, selling has been intense, but currently one measure of bullish sentiment places it near an extreme from where previous low readings have signalled major advances. Here is the daily gold chart of the decline off the March high:

Past performance is not a guide to future performance.

The stand-out feature is the excellent pair of tramlines joining the major highs (resistance) and lows (support). These highs and lows all accurately touch their lines, which gives strong validity to them as future targets for support and/or resistance.

Also, note the wave pattern that strongly suggests the market is completing a wave b low prior to an upwards surge in a c wave, and this surge should be very strong given the large momentum divergence that is building.

When wave b does terminate, my major target is the $1,800 region ($145 above current).

With this background, how are the gold miners shaping up for a rally phase? Here is a very popular gold ETF – the VanEck Gold Miners ETF (LSE:GDX) (latest $24.40):

Past performance is not a guide to future performance.

Note the record high was set in August 2020 and failed to make a new high above that when gold surged to its high in March of this year. That was when my wave b top occurred.

But of great interest is the action of the RSI (Relative Strength Indicator) in the lower section. One of the rules for using it as a signal for a trend change is to note when it rises above the 70 level (overbought), or when it falls below the 30 level (oversold).

Note the arrows that indicate the major highs and lows accurately on these occasions – and today, the RSI is testing to 30 low. The market is oversold.

And the form of the current wave pattern matches that of the metal with an a-b-c in formation.

Last week, the shares fell to the Fibonacci 76% support level – a common last chance saloon level for a possible reversal.

On Wednesday, the Federal Reserve will issue its hotly awaited statement on interest rate policy (among other matters, such as the pace of quantitative tightening), and the market is expecting another 75-basis point hike, with some looking for 100 bps.

But even a slight deviation from a very hawkish stance would very likely induce buying of the dollar and the PMs. 

John Burford is a freelance contributor and not a direct employee of interactive investor.

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