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Despite the sell-off in Monthly Nearby Gold since September 2011 at $1942.30, the main trend is still up because the market still has not taken out any significant bottoms. The chart pattern also indicates the Gold has not even retraced 50% of the rally from $725.60. These are positive signs that may be indicating there is still life left in the futures contract.
The May bottom at $1533.70 is minor support. This is followed by the uptrending Gann angle at $1461.60 and the major 50% price level at $1333.95. The month begins with the contract challenging a downtrending Gann angle that has controlled the direction of the market since September 2011. This angle is at $1590.30. A breakout over this angle could trigger an acceleration to the upside, however low volume appears to be holding back the market.
If there is a successful breakout rally then traders should look for a rapid move into a 50% retracement level. Based on the short-term range of $1942.30 to $1533.70, the first upside target is $1738.00 to $1786.21. Additional resistance is at the downtrending Gann angle at $1766.30.
One problem with Gold is that investors aren’t sure whether it is an investment or a reserve currency. As an investment, it is relatively inexpensive. However, as an investment, investors are buying it at low prices and flipping it at high prices. This is creating some of the sideways trading action we have been seeing. As a reserve currency, gold is subject to the movement in the U.S. Dollar. Since the dollar has been trading firm since late April, gold has had a difficult time rallying.
Since gold is considered a store of value during economic turmoil, investors may return to it as a safe haven investment as the reality of another recession becomes clearer. So while investors have been buying gold on dips and selling it on rallies, keeping it inside of a tight trading range, the market may be set up to finally break through resistance if there is a good story behind the rally to support further upside action.
Gold speculators may not be willing to wait for a recession to start before taking action. This means that as signs continue to mount of an impending recession, they may begin to step in to buy gold. This should become more apparent if the implementation of additional quantitative easing weakens the U.S. Dollar.