Gold price declined yesterday, together with the U.S. stock market and other commodities. It slashed $200 of its value in a matter of a few days, reminding everyone of its volatile character. What goes up, must come down!
Indeed it came down, but in doing so, it just confirmed the bullish break in the first place. More precisely, gold price broke higher out of a triangular pattern. However, the break was not followed by the mandatory retest of the upper edge of the triangle. That retest came, and it represents a good area to gain exposure to gold.
Gold and Inflation
Like many commodities, gold is a store of value. It protects against inflation. Therefore, investors prefer allocating a small part of the portfolio to gold, to hedge against inflation.
But the coronavirus pandemic brought something interesting. A new competitor appeared one that took many investors by surprise. Cash.
Central banks around the world slashed their rates in response to the coronavirus pandemic. Those that did not have room to cut rates, engaged in quantitative easing. As a consequence, the money supply exploded. Therefore, inflation is just around the corner.
However, if inflation is to fear, investors would be better off if they borrow cash for the long term using the cheap financing conditions that exist today. If inflation fears materialize, gold price will rise. But at the same time, fiat currency’s present value would be higher by the opportunity cost.
Gold Price Technical Picture
After completing a running triangle, XAUUSD retests its upper trendline. While the move lower was very aggressive, it currently bounced from dynamic support.
To trade the bounce and make the most of this key area, aggressive traders should go long at the market. The proper area for a stop-loss is the one below the triangle’s apex. Effectively, a stop at $1750 is enough for targeting new highs and using a risk-reward ratio of 1:2 or even 1:3.