From One Wedge to Another

The gold price broke out above $1830 a day after I wrote about this possibility earlier this month. However, it didn't reach $1900. Instead it was slammed lower on leaching $1860.

Having broken out of one wedge formation, the gold price is again trapped in a wedge. One with a steeper line of support to the downside, and a flatter line of resistance to the upside, as is evident in the monthly gold chart:

Monthly gold chart

This means that our year end target of $2100 is unlikely to materialize. However, we're well positioned for a strong move higher next year. Resistance has been weakened and support has been added. We're more likely to move higher than lower from our current price level at $1790.

The monthly chart reveals a giant cup and handle formation that's been in the making for more than a decade. The cup was completed in 2019, and the handle will be completed once we reach $2100. This will then signal a move up to $3000. To the downside, there's support at $1760 and $1690.

There's also fundamental support for the gold price. Inflation anxiety has accelerated demand for physical gold, which has pushed gold into backwardation. People are willing to pay extra for early delivery. This puts pressure on the futures market because it opens for arbitrage based on physical delivery. There's money to be made by delivering physical gold while at the same time buying futures.

This trade can only continue as long as physical gold is delivered when future contracts expire. With arbitrage in favor of physical delivery, there's less willingness to roll paper contracts into the future, and it becomes increasingly dangerous to be on the short side of trades. With fewer willing to go short, prices go up.

Rococo Cup with handle

By Vincennes Porcelain (France, circa 1739–1756), Francois Binet (France, active 1750-1775, born 1731) - Image: http://collections.lacma.org/sites/default/files/remote_images/piction/ma-31852871-O3.jpg Gallery: http://collections.lacma.org/node/229367 archive copy, Public Domain, Link