One of the most interesting markets during the COVID-19 pandemic and the inflationary times that followed was the price of gold. Historically, gold and other precious metals acted as a hedge against inflation.
As an alternative investment, the price of gold should have surged together with the prices of goods and services.
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Only it did not. Just the opposite – it hovered around the highs and now pressures the horizontal base of a neckline part of a double top pattern.
Gold price dropped more than 3% in August
Inflation keeps rising in the United States and most of the world, but it did not send the price of gold higher. In fact, while inflation threatens to move into double-digit territory in Europe, the price of gold dropped by more than -3% in August.
Besides being down in the last month, the gold also delivered negative returns YTD. It is down -6.46% since the start of the year, and many investors do not see the point of owning gold as a diversification strategy.
Gold price prediction: double top pattern hints at more downside
Gold investors may be in for further surprises. The market struggles to hold above horizontal support given by the neckline of a possible double top pattern.
A double top is a reversal pattern forming at the end of bullish trends. The chart above shows the gold price surging since 2019 and forming a double top during the COVID-19 pandemic.
A drop below the neckline points to further downside for this market. The pattern’s measured move, seen in orange, hints at a drop below $1,400, thus indicating further US dollar strength.
To sum up, the correlation between the price of gold and inflation is broken. If the market confirms the double top pattern, the US dollar’s strength may trigger a decline in the prices of goods and services in the United States and other advanced economies.
Only if inflation drops the correlation with the declining gold price holds true. As the Fed seems determined to raise the interest rates further, traders should not rule out further weakness in the gold market.
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