Gold Breakout - Continuation Or Failure?

Gold delivered a magnificent rally over the course of the last month. It performed slightly more than 10% during this short period of time. The party is probably not over yet. Some follow-through on the upside is likely.

The spike occurred not unexpectedly. Back in February, we warned that goldneeds a 5%-7% correction before resuming its upside trend. Our conclusion was to "remain patient during the next few weeks and focus on buying the dip". Price action followed our projected price path exactly. The very first chart below shows our projection from February 27th 2019. Subsequently, gold corrected 6% from the February high before spiking to the upside recently.

Our reasoning back then was a combination of technical analysis and behavioral economics. Gold traced a triangle pattern over the course of the past three years. That is a sideways consolidation formation. Eventually, market participants anchored their expectations before the pattern resolved into the direction of the paramount trend. Triangle resolutions are most often swiftly. That's exactly what happened over the course of the past month.

The negative aspect of the sharp rally in gold is that it has been noticed by market participants and mainstream media. Sentiment picked up as quickly as prices during the past month. Our sentiment gauges show a bullish stance for gold at the time of this write-up. It reaches nearly into the territory that prevailed around the 2011 highs. Subsequently, a correction was triggered back then. It led to a 45% decline over the course of the next few years.Some form of consolidation is likely for last month's rally as well. However, it will be probably shallow and brief. We expect the next correction to unfold as a retest of the 1,350-1,370 area. That is a significant horizontal support/resistance, which limited the upside for gold on 7-8 instances during the past few years. Three of these instances were followed by double-digit declines after gold failed to push through that area. Gold spiked through that area without paying notice last week. A retest of this technically relevant level is likely.

Moreover, the retest could bring sentiment back to neutral territory. This would set the stage for another push into our target of 1,500-1,570 US dollars. We stick with this target and expect to see gold trading there within the next six months. Hence, it appears attractive to buy the dip if gold reaches again into the 1,350-1,370 area for a retest. What happens upon reaching the 1,500-1,570 target? That area is not a final target. Instead, it is a high confidence forecast that gold is likely to get there short-term. We will reassess our outlook if and once the precious metal confirms our forecast and reaches into that area.

Last but not least, the gold rally is likely to drag silver and platinum along. Both metals are characterized by significantly less bullish sentiment at the moment. Market participants seem to believe in the gold story and neglect silver and platinum in general. We remain bullish on silver and platinum for the next few months.

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