Home > Bearish Divergences Spell Trouble for Gold Bulls

Bearish Divergences Spell Trouble for Gold Bulls

July 7, 2020 By Mircea Vasiu

Gold is one of the closest viewed assets in a recession. That is especially true when inflation threatens to get out of control as gold is considered a hedge against inflation. Moreover, it tends to outperform equities in environments when inflation gets above trend.  

So far, inflation is not picking up consistently anywhere in the developed world. Naturally, this raises the question of what is the price of gold doing at the $1800?

Some Interesting Divergences to Consider

To start with, any technical trader could not miss the rising wedge formation seen on the gold charts. More precisely, when the market keeps forming higher highs and higher lows, that is the sign of a bullish trend. However, if those highs are only marginal ones, a rising wedge scenario should not be ruled out. A break below the lower edge of the pattern confirms the reversal pattern.

Furthermore, some other interesting signals appeared when interpreting the current price action on the gold market with correlated markets. While the uptrend in the price of gold is obvious, the higher highs it makes are not confirmed by the Japanese Yen, silver, nor mining stocks. For everyone interested in the gold market, that is troubling, to say the least.

When looking at the price of gold, it is important to remember against what other asset/currency it refers to. If it is the USD, then the USD component of the equation plays an equally important role.

Having said that, the dollar tends to strengthen in the run-up to or during recessions. There is more and more evidence that the coronavirus pandemic recession is not going away so soon as we would like it to be – is there a dollar strengthening coming as the recession takes its time?

All in all, the signals from the gold market are conflicting, to say the least. That is especially troublesome as we enter summer trading, with many investors preparing for the summer holiday. As liquidity drains, even the small market moves may become amplified by a lack of market participants.

An ancient Asia proverb is saying that “he who has the gold makes the rules.” However, the price of any assets does not move in a straight line, but it corrects from time to time. It is the job of a trader to find those moments and speculate on the market moves.