What Really Drives the Gold Market

Historically, it’s hard to think of a commodity that has attracted as much speculation as gold…

Nearly everywhere you look, someone is forming yet another prediction that gold will rally several times higher over the coming years.

The problem with that, of course, is that there’s little to no likelihood that these big predictions will happen.

Plus, it totally ignores the fundamentals that often drive the physical gold market…

The truth is, often the gold price is driven by something much more mundane… like the old supply and demand curve.

Like central banks buying and selling. Or gold’s use in things like jewelry, electronics, and medicine.

But, it doesn’t mean you should ignore gold altogether…

It just means that you need to be more realistic about its profit potential… and then work out the best way to trade gold over and over again.

One way I trade gold is through the SPDR Gold Shares ETF (GLD) – an ETF that replicates the gold price.

Let’s check out the chart…

SPDR Gold Shares ETF (GLD)

Source: eSignal

After hitting its June 1 high, GLD gapped down heavily through the middle of the month.

You can see the severity of the sell-off by the two moving averages (MA)… the 10-day MA (short-term) crossed down over the 50-day MA (long-term) at almost right angles.

From there, GLD rallied only gradually before again gapping down into early August. The low on August 10 ($160.68) formed the bottom of the current trading channel – represented by the lower dark blue horizontal line.

Then, along with the Relative Strength Index (RSI) forming a ‘V’, GLD rallied off the August low through to its most recent high of $171.55. This level coincides with the highs from July 29 and August 4 and forms the upper band of the trading channel.

With GLD in a channel, the two MAs have been tracking each other closely since the middle of July.

That sort of action is unusual for MAs with such a big difference in time periods (10 days versus 50 days). History tells us that this sort of action doesn’t last long…

Eventually the 10-day MA (red line) will cross over the 50-day MA (blue line) and will bring a new direction with it.

And that could soon be in the cards…

Let’s take another look at the chart…

SPDR Gold Shares ETF (GLD)

Source: eSignal

As you can see, the 10-day MA crossed above the 50-day MA over the past few days… that’s a bullish signal.

And that’s why the upper trading channel line (short-term resistance) will play a crucial role in what happens next with GLD.

With momentum increasing (as per the RSI), the next test for GLD is to see if it can rally up to, and through, the upper channel.

If GLD can break above that level and hold it, that would mean GLD is transitioning from a range-bound market into a new uptrend… and that could provide a great opportunity to go long.

That would also bring the high from June 1 back into the picture. The next test to confirm a new uptrend would be for GLD to break above that June high of $178.85.

For now, though, it all comes down to that upper resistance line of the trading channel…

If GLD doesn’t break through it (or even fails to reach it), that means GLD’s range-bound pattern still has some time to play out.

However, that means we’ll still have plenty of opportunities to generate trades…

If GLD rebounds lower off resistance, along with an overbought signal from the RSI, it could quickly fall back down towards the lower part of the trading channel.

And we could profit from this move by entering a short trade.

Either way, we know that we’ve got a strategy to generate profits regardless of which direction gold takes from here.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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