Gold is considered the perfect hedge against inflation. In a time when inflation is nowhere to be seen, many are turning their back from gold to other assets (e.g., Bitcoin) that offer similar protection on top of the potential of capital gains.
At the start of every trading year, it pays off to have a look at the bigger picture of most assets in financial markets. In any technical analysis project, the bigger timeframes have an advantage over the smaller ones in the sense that they filter the noise. On the monthly chart, it does not matter the number of jobs created in a month or what the Fed says or did about the dollar at one point in time. Instead, historical levels that proved significant in the past may have an influence in the future.
$2,000 – A Pivotal Level
The monthly chart above reveals two simple technical analysis concepts that worked like a charm. First, the 2011 run at the highs was met with strong resistance right shy of the $2,000 mark. For several months, the price of gold tried to break higher and eventually was rejected.
On its move lower, it found a bottom close to the previous round number – the $1,000 level. It also formed an inverted head and shoulders pattern, one that broke higher six months before the COVID-19 pandemic. This is what most traders miss – the price of gold broke higher not due to the pandemic, but it did so way before the world even heard of the virus. As it turned out, the virus represented just the excuse for the price of gold to break previous resistance – the resistance that it failed to break back in 2011.
Second, the interchangeability principle calls that, once broken, resistance becomes support, and support becomes resistance. Therefore, the recent pullback from the highs met support given by the previous resistance – so the price of gold bounced strongly, now threatening to move above $2,000.
What about the U.S. dollar? Is it mandatory for it to decline further for the price of gold to trade above $2,000 again? The answer is no because the U.S. dollar bearish trend continued for several months after the price of gold reached $2,000. In other words, the price of gold lagged the move lower in the dollar, fueling expectations that it will trade again above $2,000 sooner rather than later.