Forbes

The gold market looks set up for a rally that could push prices to challenge crucial long-term resistance. Gold’s been on a strong rally since last fall, running up about 20% to a recent $1,426 an ounce. Based on the long-term charts, if the Federal Reserve cooperates and cut interest rates while signaling a willingness for more, gold could push to a high that would bump it up against resistance near $1,550. That’s the base of the period when gold chugged to an all-time dollar high of almost $1,900 in 2011.

Right now, gold looks like it has found a new support base at $1,400-$1,425 range. Chart wise, this is from the completion of a classic flag formation, on the monthly chart, starting last August and completing this month, as this chart of monthly gold prices shows. (And yes, I know other analysts say you can’t have flags in long-term formations. I disagree.)

Gold looks set to extend its rally and test decade-long highs.
The monthly chart shows gold has set a new base at $1,425. That has it set to rally furtherCREATED WITH KOYFIN

Gold is a complex market with a number of forces at play, so nothing is guaranteed. But essentially gold goes up when the U.S. dollar gets weaker (and conversely, goes down when the dollar is strong, such as the historic gold market bottom of 1999.) The read here is that the Fed is signaling it’s done trying to put the capital markets on a diet. Not only with the seemingly guaranteed lowering of interest rates tomorrow which will continue to support the stock market, but with the likelihood the Fed will be even more reluctant to trim its $3.8 trillion balance sheet built up by the (very effective) policy to pull the economy out of the financial crisis last decade. That’s supportive for gold in part because a huge existing balance sheet could mean there’s less for the Fed to turn to if the economy worsens dramatically.

Cutting interest rates while the Fed owns $3.8 trillion of assets looks bullish for gold.
The Fed bought up $4.5 trillion of securities at QE’s peak. It stills owns $3.8 trillion and seems hesitant to lower it further.FEDERAL RESERVE BANK WEBSITE

Consider that in March the Fed said it was going to largely stop reducing its balance sheet built up from Qualitative Easing. That came after a 15% rally in the stock market after the December drop. Efforts to reduce the balance sheet have been met with periodic “taper tantrums” (many say December’s drop among them) that clearly have spooked the central bankers.  A good read about how all this plays bullish for gold in the extended long term is a recent postby billionaire hedge fund manager Ray Dalio.

Returning to the gold price, while there are a myriad of indicators telling us we’re at a good level of support, it’s a less confident call for gold’s target price right now. Arguably the run from this May starting at $1,223 an ounce to $1,334 at the end of June, followed by the consolidation period we’ve seen since, is a flag formation projecting a rally to $1,545 an ounce, as the chart below illustrates. That’d be about a 9% gain from spot gold here and put prices right at significant resistance, the base of the April 2011 to April 2013 gold formation. That level of resistance is a natural target itself, lending a little more confidence to the price projection. If you prefer to trade the gold ETF (GLD), the equivalent price target would be $145. On the other hand, if the Fed shocks the world and doesn’t lower rates, gold’s current support could be broken quickly.

Gold's flag formation hints it may soon race to long-term resistance around $1,545
The May-June rally in gold and subsequent consolidation infers a further 9% rally may be in store.CREATED WITH KOYFIN