Gold remains remarkably resilient
SINCE the December 2017 Federal Open Market Committee (FOMC) meeting, the price of gold has been remarkably resilient despite the US Federal Reserve hiking its funds rates by 25 basis points to 1.5 per cent. Instead of the widely expected sell-off, gold rallied 7 per cent with a similar bottoming price action pattern around the rate hike days, going back to the December 2015 rate hike.
First, let us examine the long-term trend for gold. Since August 1999, the secular uptrend was set in motion. Gold experienced a raging bull run for the following 12 years where it all came to a screeching halt in September 2011. During the bull run, gold price increased seven-fold from a low of US$253 to a high of US$1,920.
A correction of 45 per cent ensued after the US$1,920 record high was formed in 2011. Interesting, the bear market in gold ended at a significant pivotal point as well. Using the August 1999 low and September 2011 high as the projection points for referencing our Fibonacci retracement levels, it highlighted an important level at US$1,088. The US$1,088 area was the 50 per cent retracement level which in hindsight worked perfectly for halting the prolonged correction since 2011. This long-term Fibonacci retracement level has higher credibility because it has stood the test of time. The 50 per cent retracement level is also one of the more important points for anticipating reversal as the uptrend regains control.
Gold did fall marginally below the 50 per cent Fibonacci retracement level (US$1,088) in December 2015 to a low of US$1,046 shown by the highlighted area, but the bulls were ready to defend that key level. For the first half of 2016, gold made strong advancement of up to 29 per cent to a high of US$1,375, signalling a stable floor at around the long-term 50 per cent Fibonacci retracement level (US$1,088) which we would not probably revisit anytime soon.
Moreover, the firm bullish rejection off the US$1,088 area since December 2015 also coincided with the formation of the eight-year cycle, making it a stronger bottoming point. Gold follows an eight-year cyclical bottom pattern where it forms a major bottom in between every eight years where it enters into an intense secular bull market. This has been true since 1985, and the pattern seems to be unfolding right in front of our eyes once again.
Relating back to current times, gold is currently at a major crossroads to decide if the explosive bull run begins or not. With much consolidation since June 2013 where gold price ranged between US$1,392 and US$1,131, a bullish reversal pattern was formed.
An inverted head and shoulders pattern was established after seeing a rally in 2017 as the formation of the right shoulder is completed. One can treat the bearish break below the US$1,131 range low in 2015 as a false breakout hence leading to the formation of the head to the inverted head and shoulders pattern. More importantly, for this bullish reversal formation to usher in more bullish momentum, the bulls need to break and close gold price above the neckline (downtrend line) shown by the black line at US$1,350. As of now, price is testing that key area.
The longer the consolidation, the greater the move once the bullish breakout occurs. With gold consolidating for the past four years, we can expect the rally to be forceful once it breaks out of the neckline. The target projection from the inverted head and shoulders pattern return a price target of US$1,700.
In summary, the long-term outlook for gold remains solidly bullish as the eight-year cyclical bottom was firmly supported by the long-term 50 per cent Fibonacci retracement level at US$1,088. Our long-term target on gold is US$1,700 based on the inverted head and shoulders pattern; and US$1,920 based on the eight-year cyclical bottom pattern.
Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.
