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Gold Looked Bullish Days Before Inflation Report

Gold bugs had another reason to celebrate Valentine’s Day after the price of the precious metal had its best daily trading session since the Brexit vote in June 2016. XAUUSD rose to $1355 on Wednesday after higher than expected inflation suggested the Federal Reserve may be forced to increase the interest rate at a more rapid pace than previously expected. The price of gold is up by 3.2% for the week so far after opening at $1314 on Monday, February 12th.

But Elliott Wave analysts did not have to wait for Wednesday’s CPI report to get an idea about gold’s intentions, since the market was anticipating a rally much earlier. The following chart, sent to subscribers before Monday’s open, explains.

gold prices elliott wave analysis feb 12

Instead of waiting for external factors such as news and events, Elliott Wave analysis focuses on price patterns, since that is how the market communicates. On Friday, February 9th, gold closed at $1314, following a decline from $1366 to $1307. Two things were important two us as analysts. First, the wave structure of this decline did not look impulsive, which meant that it is probably just a correction within a larger bullish sequence. It seemed to be a w)-x)-y) double zig-zag. And second, this 59-dollar slump has been developing within the parallel lines of a corrective channel, whose lower line was supposed to act as support and encourage the bulls for another run. We thought $1307 was an appropriate level for a stop-loss order, providing “a very attractive risk/reward ratio for a long position.” The updated chart of gold below shows how the situation developed.

gold prices elliott wave analysis feb 15

Fortunately, $1307 was never tested again and gold started rising almost right away on Monday. It breached the upper line of the corrective channel a few hours before Wednesday’s CPI report and despite the swift decline to $1319 that followed, the bulls managed to recover and reach an intraday high of $1355.

Inflation, employment and GDP may be the best possible indicators about the economy, but traders, who wait for those numbers in order to develop a trading strategy are, in our opinion, doomed to failure, because how other market participants would react to it is much more important than the actual piece of information economic reports provide.

In general, higher inflation, means higher interest rates, which, in turn, means lower gold prices, because gold does not provide the yield investors are seeking. On the other hand, higher inflation leads to currency depreciation, forcing investors to buy gold as a hedge, thus increasing its price. As you can see, fundamental logic leads to two contradictory conclusions. It turns out higher inflation causes the price of gold to fall and rise simultaneously. In our humble opinion, this is pure nonsense and the very reason why we rely on Elliott wave analysis and not news-interpretation.

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