Market sentiment for gold shifts focus back to geopolitical tensions and rising inflation

Yesterday’s market sentiment was an underlying explanation as to why gold traded lower on the day. Market participants focused on Chairman Powell’s speech on Monday, where he opened the door for further rate hikes (1/2% instead of ¼%) at one or more of the six remaining FOMC meetings.

In a speech Powell delivered at the National Association for Business Economics, he said, “We will take whatever steps are necessary to ensure a return to price stability. In particular, if we conclude that it is appropriate to act more aggressively by raising the fed funds rate by more than 25 basis points at a meeting or meetings, we will do so.”

Interestingly, market participants did not react strongly to Powell’s remarks until yesterday. Based on gold futures, the April contract lost $13, and the candlestick that formed from that day contained a lower high and a lower low than the previous day. Using market sentiment alone to base market decisions is almost always unreliable when used alone.

Inflation it is still warming up; Russia is brutally destroying Ukraine and US Treasury yields continue to rise. Intrinsically, market sentiment is based on emotion, and its sentiment changed from Monday to Tuesday.

A market technician relies almost entirely on technical studies such as pattern recognition. One of the best market technicians of our time is Seiko Shimizu who wrote the book “The Japanese Chart of Charts”. This first book to be translated into English gave the Western trader the ability to understand the techniques of his counterpart, the Asian technical trader. I mention this because I think this is one of the best explanations for why technical studies seem to have the more reliable insight needed to analyze a market.

“A graph is like the whiskers of a cat.”

In her book, Seiko Shimizu describes the process a cat uses to catch a mouse, saying, “I don’t think the cat understands the mouse’s feelings and thought patterns.” She then breaks down the components that comprise the data used for fundamental market analysis. Components “such as political and economic conditions, supply and demand, speculation, and the mood of the market at the time. However, it would be impossible to express these factors in the form of percentages in order of importance in terms of the influence of the bull and bear market.

The reason I have spent most of this article talking about the difference between fundamental and technical market analysis is that a market technician does not place the same importance on market sentiment or human emotions.

This is one of the reasons I addressed this anomaly yesterday on the member page for our premium subscribers: “Today, market participants turned their attention from concerns about rising inflation and the war in Ukraine to the speech of yesterday from Chairman Powell indicating a much more aggressive monetary policy. policy to combat rising inflation. However, I believe market participants will quickly refocus on the more immediate concerns of escalating geopolitical tensions resulting from the Russian invasion of Ukraine and the effect it will have on raising the current level of inflation.”

The fact is that market sentiment can change on a dime and pivot haphazardly sometimes. Mathematics, which provides the central tool used by the market technician, simply cannot lie or be swayed by human market sentiment.

That is exactly what we saw today as a turn to bullish behavior, believing that gold prices will rise simply based on high inflation by some quantifiable number. My bullish market sentiment has not changed during corrective periods because I strongly believe that the charts indicate that we are still inside of an extremely bullish long-term rally that took gold from the low of $1061 during December 2015 to the highs reached six years later. resulting in a doubling of the price of gold to the all-time high that occurred in August 2020 at $2088.

Chart 1: Gold Forecast Based on Technical Studies

Gold Forecast based on Technical Studies

This brings me to my short and medium term forecast. I remain extremely bullish for the next 4-8 months with our technical studies forecasting gold to hit a new all time high ending this rally taking gold prices to $2100 on the low side and $2300 on the high side.

The chart above contains technical studies as well as our short and medium term forecast for gold. It uses Japanese technical theory incorporating Japanese candlestick patterns. These patterns are seen through market timing created from Elliott Wave Theory, and the price points for entry and exit targets were determined by sets of Fibonacci retracements.

For those who want more information, just use this link.

Wishing you good business as always,

Gary S. Wagner

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