Is Gold Topping or Basing?

Gold has been featured prominently in public news stories, but the price has actually fallen almost 20% from its peak.  Has the shining precious metal formed a top… or is it building a base from which to rally higher soon?

Let’s take a couple of perspectives:

On the daily chart, a down trend has been clearly established and confirmed, yet price has (currently) formed a higher low and is finding support via its 200 period moving average near the $860 per ounce territory.  This will be a critical area to watch to see if prices stabilize here… or break down for more depreciation.

After three Momentum Lows, price has continued as expected to the downside, but the May momentum low was a higher low as price made a larger downswing, meaning a positive divergence was in play.  Price just formed a new (relative) momentum high at the end of May, which could be a sign of strength yet to come, but time will tell.  The picture is a little murky to slightly bullish on the daily chart, provided we stay about $850 per ounce.

Let’s look at the weekly chart:

If we examine this chart, we observe price as being in a long-term confirmed positive up trend, and still is.

A flat momentum divergence preceded the drop in price, and the May low registered a new momentum low on the chart, which may or may not be followed by a new price low, the logical spot for support being the rising 50 period EMA at around $830 per ounce.  I will consider this the “line in the sand” in so much as if the gold bulls can hold this level convincingly, higher prices may yet be ahead.

If $830 fails and price breaks convincingly beneath $800 in the near future, then we could expect lower prices, as this would confirm a downtrend in price on the larger time frame.

If you desire to trade gold but do not want to open a futures account, you may use the GLD exchange traded fund which currently stands just shy of $86 per share.

With Fed Chair Bernanke expressing his concern about inflation, you would expect gold prices to rise, as gold is a good hedge against inflation.  The US Dollar Index is strengthening and could be reversing to the upside, which will put pressure on gold (and crude oil) prices.  Short term treasury yields appear to be rising as well, which could put further pressure on the precious metal.

With all these intermarket forces at work (and more), it will be fascinating to see what happens!