Here’s the seasonal chart below.

We can see that we are at a key time for the gold seasonal.  Lows are usually made right at the end of August.  Interestingly, we are only about 30 dollars above the July lows, and the choppiness we’ve seen in gold is actually what the seasonal suggests this time of year.  What’s important for gold is what lies in front of us.  September.  You can see that a nice rally usually develops from somewhere in this time frame.  The “optimum” time is about to arrive.  Like the other commodities gold also went to the barber shop last fall.  But unlike all other commodities, gold has returned to its highs……….a real sign of strength so far.  I say so far because we must also conclude that gold has not made a new high for 18 plus months.  Many are anticipating a tremendous rally should the highs succumb to price.

If the seasonal plays out then a rally is due to begin within two weeks and a September rally will ensue.  One needs be careful however, as the metals are also well known for pullbacks in the October and November time frames.  When gold is very strong it will bypass or only pullback slightly then and move into its winter peaks.  However, in a normal year, gold has a decent pullback in that time period (Oct/Nov) as well.

The tremendous consolidation and current coiling action in gold makes us sure of one thing.  A good sized move is coming up.  I’ve drawn two key trend lines on the weekly chart above.  As long as we are above those up channel lines, we should assume a fall rally.   The end of August is notorious for a steep drop and reversal for gold.  Keep your eyes open.  Should there be a big thrust down towards the lower channel lines on the chart above, and then a subsequent reversal and turnaround back up in early September, then the odds will greatly increase that the fall rally is under way.

On the upside, traders and technicians are looking at this triangle formation that has developed on the chart.  Moves above the 975-985 area would greatly favor an upside breakout and moves above the 1075-1100 would be indicative that the next leg of the gold market has begun.

Conclusions

The gold market is close to starting a good move.  Many participants are expecting an upside breakout.  While that may well be the case, make sure you keep your eyes on the downside too.  The “inflation” scenario is a crowded one and the dollar bull is a rare specie at this time.  While I won’t argue the inflation point, I want to see price confirm such an occurrence.

On the chart there are two channels that are PARAMOUNT to an uptrend support.  There is also a blue horizontal line showing support at the 850 level.  Should we begin to break these red trend lines, especially the lower one, it will be a warning to gold bulls that all is not right underneath.  This is especially important this time of the year as gold is usually strong after August.  Should a drop occur in the next few weeks that hold’s any of these support areas, it just might end up being the low before the fall rally.  However, any break of the 850 area would be a warning shot across the bow that gold’s seasonal move would be in serious trouble.  So keep your eyes on the 850 – 880 – and 925 area in gold.

If these support areas hold and gold breaks above the triangle lines and 975- 985, the upside will be the odds favored move in the coming months.

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John Winston