Gold Price In 2014 Consolidating Above Major Support Area

So far, the gold price in 2014 in the first six months has been trading in a tight range between $1190 and $1390. The yellow metal had one significant rally in February / March and one moderate rally starting in June.

The spikes in the gold price in 2014 have been driven partly by fear and partly by inflation expectations. The first rally coincided with the outbreak of tensions in Ukraine. The second (modest) rally was driven by the US Fed statement mid June that inflation expectations are soaring.

Basic chart analysis shows that the gold price chart in 2014 has a clear “line separator” which has served as major support throughout the first half of the year. As evidenced by the first chart below, the $1270 – $1280 area has been resistance in the first weeks of the year and subsequently turned into support after the February / March rally.

gold_price_daily_25_July_2014

 

From a technical point of view, the gold price is developing a major trading range. After the crash of 2013, both gold and silver established a bottom in the summer. That bottom was tested on the last day of 2013. Since then, the newly developed trading range has held up quite well. The general rule of thumb is that the strength of a trading range (“consolidation”) is a function of the time spent to establish that range. The fact that gold, silver and miners are trading in a range for a year now should result in a solid base before a new trend starts.

The above chart also shows that the very short term trend has been down, as evidenced by the blue line connecting the highs in July. The price has touched the trend line three times, a sign that the price is ripe to start trending.

In which direction will the gold price be trending in the second half of 2014? That is impossible to say. For the time being, there are two conflicting forces at play. First, the bullish force is that August till December is the seasonally strongest period of the year. Particularly August is a month in which the metals close almost always higher, as we wrote here and here.

On the other hand, the dollar, which is in general negatively correlated with gold, has started an uptrend recently. The following chart is the same as the previous one but with it shows additionally the dollar (grey line). The blue lines are the dollar’s trending lines for 2014. They show that the key chart formation has been a triangle. The purple oval shows that the dollar broke the trend a week ago; it has been moving steadily higher since then.

gold_price_vs_dollar_daily_25_July_2014

 

Interestingly, but unsurprisingly, the yellow metal has closely tracked the gold miners index (HUI) for the whole year. The fact that there is no divergence between the metals and the miners is not really telling anything about gold’s prospects. At least it is not a bearish sign neither.

gold_price_vs_gold_miners_HUI_25_July_2014

 

Going forward, gold should respect its key support area, especially during its seasonally bullish period. Today, July 25th, spot gold closed at $1307.65, up 1.32% on the day. For an uptrend to establish, at least three consecutive closes above $1310 are required.

 

Chart courtesy: Stockcharts.com.

 

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