Gold has a big daily drop following Fed and ECB announcements. The pullback lasted 2 days before a big blast higher.

Image from Investing.Com, annotations by Mish

In the wake of fluff announcements by the Fed and ECB in which no reporters asked any difficult questions, gold took a mini-dump then surged twice as much two days later.

Triple Top for Gold?

Gold weekly image courtesy of StockCharts.Com. annotations by Mish.

Gold Weekly Chart Technically Speaking

• To answer my own question, neither triple tops nor triple bottoms tend to hold. If that view is correct, gold is headed higher.
• Seasonally speaking, gold is heading into a favorable time of year.
• Finally, this has been a long 3-year consolidation period, with gold not too far from record highs.

All things considered, the above chart is technically encouraging.

Gold Monthly Chart

Gold monthly image courtesy of StockCharts.Com. Annotations by Mish.

That is likely the prettiest cup and handle technical formations you will ever see. It took 10 long years for gold to get back to its 2011 high. Then we had a handle build over three years.

The chart is so perfect, I wonder what’s wrong with it. This is a bullish technical pattern as well. And if everyone was jumping up and down screaming about this, I would be more concerned.

Instead, gold fell out of favor, and is still largely ignored.

Gold Does Not Follow the Dollar!

Gold vs the dollar images from StockCharts.Com, annotations by Mish.

• The amount of nonsense spewed over gold and the dollar is stunning.
• With the US dollar index at roughly 90, gold has been at $400, 1,000, $1,200, and $1,400.
• With the US dollar index at 102, gold has been at $300 and $2,000!

It’s true that on any given day the dollar and gold go in opposite directions, but even then, we have seen years in which gold is positively correlated to the dollar.

Over time, gold certainly does not follow the dollar as the above chart proves.

So what does drive the price of gold?

Gold vs Faith in Central Banks

Gold does not always follow the dollar in any meaningful sense, as nearly everyone suggests. Instead, gold tends to follow faith in central banks.

I created the above chart several years ago. It’s still valid today. ECB president Mario Draghi allegedly saved the Euro, restoring faith in central banks right near the then peak in gold.

“The ECB will do whatever it takes to save the Euro, and believe me it will be enough,” said Draghi.

Q: What did Draghi do?
A: Nothing!

That’s correct, nothing at all. His speech was enough. Bond yields crashed, and faith was restored.

The same thing happened during Greenspan’s “Great Moderation”. Interest rates fell and gold fell from $800 to $250. Gold generally does terrible in disinflation (falling rates of inflation).

If you have faith in central banks, sell your gold. Otherwise, I suggest hanging on to it.

Is It Time to Bet on an Inflation Overshoot?

In a related post, I asked, Is It Time to Bet on an Inflation Overshoot?

Also consider Inflation Adjusted, Men Are Making Less Money Than in 1979, Women Are Doing Better

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