In our gold chartbook from Jan. 20, we assumed that gold should have some more upside potential given the favorable seasonality until the end of February. So far, gold indeed managed to climb higher and reached a two-month high on Jan. 24 at $1,853. At that point, gold prices had recovered $100, or 5.79%, from the December lows within just six weeks. Seasonality favors another wave up.
However, these gains attracted some profit-taking at prices around $1,850. And in the aftermath of last week’s FOMC meeting, gold sold off for three days in a row. This merciless sell-off only ended at $1,780 wiping out nearly all gains since mid-December. It was some form of the classic “the bull walks up the stairs and the bear jumps out the window” pattern, which is a typical behavior within an uptrend.
Exactly for this reason, the deep pullback did not necessarily end the recovery in the gold market. Of course, in the bigger picture, the entire precious metals sector is still stuck in this tenacious correction, which has been ongoing since August 2020. In the short-term, however, the pullback has created an oversold setup and once again proved that there is buying interest at prices below $1,800.
U.S.Dollar Index, daily chart as of Feb. 3. False breakout?
U.S. Dollar Index, daily chart as of Feb. 3, 2022.
It also seems that the U.S. dollar might have hit an important top last Thursday and is now moving lower, which would be very supportive for gold, of course. Everyone is expecting the U.S. dollar to go up as the FED is expected to raise interest rates. But the U.S. dollar has been discounting this “hike-and-taper scenario” for several months already. Actually, the U.S. Dollar Index has been rallying +8.8% since May 2021. During the recent FOMC meeting, however, big money might have used the seeming breakout to sell their dollar longs into a favorable high-volume setup. At the same time, stock market sentiment was extremely bearish. Hence, last week likely triggered a top in the U.S. dollar and a violent back and forth bottoming pattern for the stock market.
U.S. Dollar Index, monthly chart as of Feb. 3, 2022. A series of lower highs!
U.S. Dollar Index monthly chart as of Feb. 3.
In the big picture, a top in the U.S. dollar would continue the series of lower highs for the dollar. As well, the U.S. dollar is moving within a huge triangle since 2001. After a series of three lower highs since December 2016, a test of the lower boundary of the triangle would give gold prices an extreme tailwind in the coming years. Hence, even if it's hard to come up with any bearish arguments for the dollar at the moment, technically it looks like the dollar could roll over.
Gold in U.S. dollar daily chart from Feb. 3. Gold’s behavior is changing.
Gold in U.S. dollar daily chart as of Feb. 3rd, 2022.
For gold, a weaker U.S. dollar would be very helpful. In fact, since the beginning of this week, we perceive an ongoing change in gold’s behavior. We are getting impressed by its intraday strength. Every small pullback around and below $1,800 was rather quickly bought again. So far, gold has only recovered 38.2% of last week’s nasty sell-off and currently sits pretty much exactly at its 200-day moving average ($1,805).
But the fresh buy signal from the slow stochastic oscillator on the daily chart promises more upside. Hence, we see gold fuming its way higher in the coming weeks. In the next step, gold will have to overcome the 38.2% resistance around $1,808.50 and then continue its recovery towards $1,830. In any case, the seasonal component is at least very favorable until the end of February. Therefore, even higher price targets are conceivable too. But gold needs to breakout above the triangle and clear $1,850. Only then a more sustainable bullish momentum would emerge which could last further into spring.
If, on the other hand, gold takes out $1,780, the recovery since mid of December might be over already and the medium-term correction might likely pick up again.
Conclusion: Seasonality Favors Another Wave Up
Overall, we assume that seasonality favors another wave up in the gold market. Thus, another rally towards at least $1,830 is realistic. We are short-term bullish, mid-term neutral to skeptic and long-term very bullish for gold.