Gold Defends the 61.8% Line, and the Bulls Answer Back

Wednesday's letter left off with a single, load-bearing question: would gold hold the $4,298 confluence level, the 61.8% Fibonacci retracement of the summer rally, on a closing basis? Twenty-four hours later the market has given its answer, and it is a resounding yes.

Gold opened Thursday's session almost exactly where Wednesday's selling had exhausted itself, trading on to the tape at $4,301, a mere three dollars above the Fibonacci line in the sand. For a tense stretch in the early hours gold gave the bulls one more scare, dipping to test, and by some measures briefly wicking beneath, that $4,298 level a final time. But true to the caveat laid out yesterday, the wick was the extent of the damage. No hourly candle closed beneath the level, and from there gold turned on a dime.

What followed was a steady, orderly grind higher through the New York morning that had none of the frantic, headline-driven character of Wednesday's post-FOMC whipsaw. Buyers pressed gold back through $4,310, then $4,330, then $4,350, and by mid-morning the metal was changing hands near $4,370, a swing of roughly seventy dollars off the session low and comfortably back above the 50-day simple moving average it had lost only a day earlier. In technician's terms, Wednesday's chart damage has already been substantially repaired, and the close-based test of support that mattered most has now been passed.

Silver, fittingly, did more than keep pace. The white metal rallied nearly three percent to trade above $65.50, compressing the gold-silver ratio back down toward the mid-sixties. A sharp, silver-led rally of this kind is typically the signature of healthy, broad-based buying rather than a narrow, single-catalyst bounce, and it is the sort of price action that tends to accompany the more durable legs of a precious metals bull market rather than a one-day short squeeze.

Part of the tailwind came from outside the metals complex entirely. Reports that Saudi Arabia expects to restore a meaningful share of its East-West pipeline capacity within days took some of the geopolitical premium out of crude oil, which in turn eased a portion of the inflation anxiety that had colored Fed Chair Warsh's hawkish tone on Wednesday. The dollar, which had posted its best single-day gain since June on the back of that hawkishness, gave back a piece of the advance, and that alone was enough to let gold breathe.

Should the rebound extend, the next Fibonacci markers directly overhead sit at $4,385, the 50% retracement of the summer range, and $4,472, the 38.2% retracement, the same measured levels that capped rallies on the way down in August. Reclaiming that zone on a weekly closing basis would go a long way toward confirming that this week's rate hike delivered a healthy secondary correction rather than the start of something worse.

None of this changes the arithmetic of what still needs to happen. The next FOMC meeting is now 41 days away, and markets are still pricing roughly coin-flip odds on another quarter-point hike, so the rate story is not going away. But from a purely technical standpoint, this is now the second time in this cycle, first back in June when the pullback from the January all-time high found its floor exactly at the 61.8% retracement near $4,013, and again this week, that this level has acted as a springboard rather than a trap door. Markets, like people, tend to reveal their character at moments of maximum pressure, and gold's character this week was that of a market still being bought on weakness rather than sold into strength. Reclaiming the $4,755 high from the summer would be the next meaningful confirmation that the mid- and long-term uptrend remains firmly intact; for now, Thursday's rebound is enough to say the bulls, not the bears, won the argument this week.

Whishing you as always, good trading.