Gold and inflation – a relationship that could once be relied upon?

When considering the daily chart for gold, I’m reminded of a well-known line from one of Samuel Taylor Coleridge’s poems, The Rime Of The Ancient Mariner, which is ‘Water, water, everywhere and not a drop to drink.’ And you might wonder why? For gold, this could be rephrased as ‘Inflation, inflation everywhere and not a bullish move in sight!’

Everywhere you look, there is inflation and seemingly more on the horizon inflation yet for some central banks, this may well coincide with the dreaded stagflation where rising inflation and struggling economies combine in a toxic mix. This certainly seems to be a distinct possibility here in the UK where the carnage of covid is now coming home to roost as indeed it is elsewhere in the world. For gold, inflation should be the catalyst for an injection of some bullish momentum, or at least to halt the weakness which has been in play since June, when the rally which took the precious metal to $1900 per ounce and beyond, petered out into the slump and congestion of the last few months. While yesterday’s solid up candle on excellent volume was a good one, both for trading and also for the precious metal, in the context of the chart it does little suggest we are witnessing the end of the current malaise.

Such rallies have come and gone before, and from a price-based perspective, the price-based resistance level which is key is all too clear and sits just below the $1840 per ounce price point and is denoted with the red dashed line of the accumulation and distribution indicator for NinjaTrader. This level was tested in consecutive months from July and has held firm on each occasion. It is a level I have highlighted several times in posts this year, and the reason it is significant is due to what lies beyond. In short, very little from a volume resistance perspective. As we can see on the histogram the volume on the VPOC histogram falls away dramatically plus there is nothing in terms of price-based resistance. It is this level which gold bugs have in their sights, and whilst it is only $100 per ounce away from the current price, there is a mountain of obstacles in the way, including the VPOC itself denoted with the yellow dashed line, a solid wall of volume, and layers of price based resistance. So tough times ahead if we are to see gold break free and past $1900 per ounce longer term. The big unknown is whether inflation will ultimately play its traditional role with gold and if so when. Perhaps when the central banks begin to take it more seriously and it becomes a reality for them as it is for us on a day to day basis, and gold reengages with its traditional role, but there is no guarantee and until then, it’s a question of waiting to see if any recovery in the price is associated with rising volume to confirm this shift.

By Anna Coulling

Charts from NinjaTrader and indicators from Quantum Trading