The Gold Sector: Close, But No Cigar…Yet!

Gold bullion and the Gold BUGS Index (HUI) are close to breaking out to the upside on the daily charts. As shown below, the US$ gold price is butting up against lateral resistance that also now coincides with the 200-day moving average (MA), and the HUI is struggling with resistance defined by a trend-line that dates back to the August-2014 short-term top. Are they going to break out and what will it mean if they do?

While I expect that gold bullion and the HUI will rise to much higher levels during the second half of this year, I don’t have a strong opinion on whether they will break above their nearby resistance levels within the next few weeks. If I had to make a guess I’d say that they will break out within the next few trading days, but this is not something I’m betting on. In any case, if breaks above these resistance levels occur in the near future it won’t mean much. In particular, multi-week tops could follow closely on the heels of upside breakouts.

The reason that breaks above the aforementioned resistance levels won’t mean much is that the resistance levels, themselves, aren’t important. For one, gold’s resistance at $1220 is primarily defined by a few minor spike-highs over only the past two months (the 200-day MA is not usually a significant resistance level for gold). For another, angled lines drawn on charts, such as the lines drawn on the HUI chart displayed above, are always subjective interpretations and somewhat arbitrary.

By the way, GDX and the XAU have already broken above similar lines to the line drawn on the above HUI chart. Here’s an XAU chart showing the breakout. In the grand scheme of things, this breakout doesn’t matter.

The point I want to make is although breaks above the price-related obstacles that are currently being challenged won’t give us useful new information, it won’t take much additional strength from here to effect upside breakouts that really do mean something. For example, in terms of confirming a major turn to the upside the HUI resistance that matters is in the low-200s, or only about 10% above Thursday’s high.

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