Till a few weeks back, gold seemed to be on a free fall. Buyers were panicking and sellers were enjoying their time in the sun. And for good reason. Gold had taken a tumble losing 20% of its value in 7 months time and with the US ending its QE, there did not seem any respite in sight. But then, something curious happened at the beginning of November. Gold stopped falling and moved to a stage of consolidation. The low had been set and that low hasnt been broken for the past 2 months.

This is a typical sign of a consolidation where the prices basically go, well, nowhere. They go up, they go down but all within the same price band and like the soap operas on TV, what you see after one month is pretty much the same what you had seen the prior month without much change. This is what has been happening to gold.

But curiously, the USD continues to strengthen and Oil has been getting pummelled but Gold has managed to hold on to its consolidation range despite all this. Which leads us to our question. Like with all price cycles, strength will be followed by weakness and vice versa. What happens to Gold if the current period of USD strength ends and gives way to weakness? It is not going to happen but as with all price cycles, this will eventually  happen. What happens to gold then?

The challenge with interpreting a consolidation range is to understand whether the cnsolidation is collecting buyers to effect a price reversal or whether the consolidation is collected sellers to continue the fall in price. This is something not easy to understand or predict. One of the methods that top traders use to understand this is the volume. If, during a consolidation period, each price fall within the range is accompanied by an increase in volume, then it basically means that buyers are accumlating and they are using this small fall in price to add to their stocks. If each fall in price is not accompanied by an increase in volume, then it means that the buyers are not interested in a reversal and they expect prices to fall further and they are just waiting on the sidelines. After all the buyers dry up, the prices fall again.

But this time, each small fall in gold price within the consolidation range has been met with buyers so far. We expect this period of consilodation to continue and we expect the gold prices to reverse in the first half of 2015. Usually, major price reversals are preceded by a short and quick continuation of price and hence expect a quick dip towards the $1100 level before the price reversal begins.

Leave A Comment

Please enter your name. Please enter an valid email address. Please enter message.