has suffered a massive drawdown over this past half-year, which was righteous after an extreme peak climaxing a monster record cyclical bull. That healthy rebalancing process left battered technicals and bearish sentiment in its wake. But interestingly gold’s corrective price action has coalesced into a massive falling-wedge chart pattern. These are quite bullish usually culminating in an upside breakout.
Back in late January, gold had skyrocketed an astounding 196.4% in 27.8 months making for its largest cyclical bull ever in US-dollar terms! Gold had shot parabolic in a popular speculative mania, as evident in crazy-extreme technicals and wildly-bullish herd sentiment. Gold crested a jaw-dropping 43.4% above its baseline 200-day moving average, the most overbought it had been in fully 45.9 years since March 1980!
I warned about that extensively at the time, arguing a serious reckoning was necessary and inevitable to reverse those epic speculative excesses. Gold’s next-ten-largest cyclical bulls since 1971 when the US dollar’s gold standard was severed averaged subsequent drawdowns of 20.8% in just 2.1 months. So I figured something similar was coming. Indeed over 1.8 months into late March, gold plunged a similar 18.6%!
That may very well have proven a solid bottom if gold’s backward war trade hadn’t flared. Gold has suffered plenty of outsized down days on US-Iran escalations, on threats of safe-haven dollar rallies and regional central-bank selling. Gold has also been pounded on irrational Fed-rate-hike fears, despite this new Fed chair’s huge shift in communication strategy likely to liberate gold from long years of Fed tyranny.
Mixing together a normal healthy serious drawdown following a truly-extreme topping, chaotic war news violently whipsawing markets, and traders trying to understand new Fed leadership’s strategy has really extended gold’s selloff. It grew to 26.3% over 5.5 months into late July, excessive by historical standards even after gold’s biggest bulls! Despite this festering selling, gold’s rate of descent has really decelerated.
Over 7/10ths of gold’s entire drawdown accrued in just the first 1/3rd of its duration! So the downslope of gold’s lower lows has really moderated, forming this past half-year’s technical support. But lower highs have fallen faster as bearish sentiment mounted, leaving traders less willing to buy. That has carved resistance with a steeper downslope. These converging trendlines have created a classic falling-wedge pattern.
Those are defined by converging downward-sloping trendlines, with upper resistance falling faster than lower support. They also see waning volume though their lifespans, as mounting technical damage and resulting bearishness erodes motivation to buy. These falling wedges coil prices tighter eventually forcing a breakout. This technical formation along with its massive scale are readily evident in this gold chart.
This massive falling wedge looks steep, but that’s only because this longer-term chart encompasses most of gold’s largest cyclical bull ever in dollar terms. If you pull up a six-month gold chart, that scale leaves the downslope way more moderate. Gold’s big reckoning since its last bull’s peak is winding prices ever tighter. As these support and resistance trendlines inexorably converge, a breakout will soon be forced.
And odds are it will prove a big upside one, gold surging to shatter overhead resistance kicking off a new upleg! Falling wedges reflect slowing downside momentum in selloffs, as capital outflows are gradually exhausted. As traders looking to exit sell, that leaves less capital left to continue feeding the downside. The longer selloffs persist, the less selling fuel remains. And buyers increasingly step in as prices stabilize.
Eventually the balance of power shifts from diminishing selling to mounting buying, reversing the selloffs that can form falling wedges. So they are considered reversal patterns, usually signaling bottomings over a century-plus of technical-analysis history. Falling wedges typically lead to upside breakouts, proportional with those chart patterns’ size. Gold is way more likely to surge as this falling wedge’s trendlines converge.
While technical analysis of price action accruing on charts is interesting, I’d never trade on it alone. Long-established buy and sell signals from chart formations are best considered peripheral, only tradable if they are corroborated by some combination of way-more-important sentiment, technicals, and fundamentals. Ultimately created by psychology and pricing, chart patterns reflect rather than contradict prevailing trends.
A falling wedge was impossible for gold in late January as it soared to crazy-overbought extremes amid intense herd greed. Those created a vertical parabola, which always culminate in symmetrical crash-like plunges. Right out of late January’s extreme peak, gold crashed an extreme 10.3% in a single trading day which was its third-worst since 1971! Bullish chart patterns can’t form during major toppings and vice-versa.
Today’s massive mature falling wedge is certainly being confirmed by bombed-out sentiment after gold’s half-year of mostly selling off on balance. The mainstream financial media which was hyping gold back in January has all but forgotten it. After months on end of suffering a serious drawdown, traders are either apathetic or bearish on gold. The don’t care anymore or expect gold to continue grinding lower on balance.
Gold’s recent extremely-oversold technicals also confirm the bullishness of its falling wedge. At mid-July’s latest low, gold closed at just 88.8% of its baseline 200dma. That proved its most-oversold levels in a whopping 9.6 years, a very-long secular span! When any price gets bludgeoned back to decade worsts, traders should act. Buying low before later selling high is best done when an asset is deeply out of favor.
And the shock value of those recent factors driving outsized gold down days is diminishing. The longer Trump’s ill-fated war with Iran festers, the more accustomed traders are getting to the chaotic newsflow out of it. That includes escalatory attacks from both sides, as well as Trump’s endless capricious threats and proclamations on Truth Social. After five straight months, that is increasingly becoming background noise.
And Fed-rate-hike fears are also losing their potency in driving kneejerk gold plunges. Back in mid-June at Kevin Warsh’s first FOMC meeting as Fed chair, he came across as hawkish promising to “deliver price stability”. Gold suffered a brutal 3.7% intraday plunge out of a pre-Fed rally on that, closing 1.6% lower! Over five trading days after that FOMC decision, gold dropped 7.8% on traders’ perceived Fed hawkishness.
Fast-forward six weeks to this Wednesday’s next FOMC decision, which was arguably even more hawkish supporting rate hikes sooner. Unlike mid-June which was a unanimous 12-to-0 vote by top Fed officials not to hike, this week’s decision was split 9 to 3 with the dissenters arguing for a 25-basis-point rate hike that very day! These guys are moving in the rate-hike direction, which traders see as gold-bearish.
Yet Wednesday gold blasted 2.9% higher intraday across the FOMC, before retreating to a +0.6% close! And midday Thursday as I pen this essay, gold is following through rallying another 1.1%. Often after FOMC decisions, resulting price directionality isn’t apparent until after the next full trading day. That gives foreign traders time to react overnight, and Americans a full day to process the implications of those 2pm decisions.
This stronger price behavior is exactly what you’d expect to see in a mature falling wedge. The longer selloffs last, the more selling is exhausted increasingly giving buyers the upper hand. So outsized down days should wane as falling wedges mature, which is indeed what’s happened with gold in July. It is reacting less to news that would’ve hammered it sharply lower a month or two ago, certainly a bullish sign.
In addition to bullish sentiment and technicals supporting an imminent strong upside breakout from gold’s massive falling wedge, so do fundamental factors. Last week I wrote a whole essay analyzing American gold-futures speculators’ positioning, which is very bullish for gold. Their total longs or upside bets are running just 9.3% above late May’s deep 3.5-year secular low! That leaves them huge room to buy and chase.
Interestingly it is big gold-futures long buying that fuels younger gold uplegs, and specs’ low longs today support major leveraged capital inflows driving gold much higher. Eventually spec gold-futures buying pushes gold high enough for long enough to finally entice investors to start returning. And they also have enormous room to buy, fundamentally supporting gold’s falling wedge climaxing in a major upside breakout.
A great proxy for American stock investors’ gold portfolio allocations simply looks at the value of bullion held by the mighty world-dominant US GLD, , and gold ETFs compared to the stocks’ collective market capitalizations. Midweek after this latest hawkish FOMC, these gold ETFs were holding $219.1b worth of gold. That’s considerable, but still radically dwarfed by the value of the biggest US stocks.
The elite S&P 500 components were worth $66,513.8b Wednesday, implying American stock investors’ gold portfolio allocations are about one-third of one percent! That rounds to zero and may as well be nothing. These guys controlling the world’s biggest pools of capital have vast room to buy and chase gold if they get motivated. If they even upped their allocations to merely one percent, gold prices would soar.
And they probably will grow more interested in gold in coming months for two reasons. First as gold’s next upleg mounts, growing sustained gains on balance will increasingly attract investors who just love chasing upside momentum. Second as this cracking AI stock bubble inevitably bursts likely leading to a long-overdue serious stock bear, investors will remember they need to diversify their tech-dominated portfolios.
And gold has proven the ultimate portfolio diversifier for many centuries, the leading alternative investment tending to rally when conventional investments weaken on balance. Gold will also benefit from either the serious inflation Trump’s Iran quagmire is fueling or that war finally winding down, ending gold’s backward war trade. Also on the bullish-fundamentals front for gold, global central banks remain strong buyers.
In mid-March gold plummeted 14.9% in eight trading days after Turkey’s central bank dumped about 1/10th of its official gold reserves! It was raising funds to try to shore up its plunging currency, which fell to record lows versus the dollar as soaring oil prices due to the war threatened Turkey’s economy. That was the catalyst that ignited gold’s backward war trade, leaving traders worrying escalations are bearish.
The World Gold Council publishes the best-available global gold supply-and-demand data once a quarter in its fantastic Gold Demand Trends reports. Q1’s released in late April showed central-bank demand grew 2.8% YoY despite the then-young war. Q2’s shiny-new GDT just published overnight into this Thursday showed world central-bank demand soaring 62.4% YoY last quarter to its strongest levels in six quarters!
Any chart pattern wouldn’t be worth the paper it was printed on if its long-established implications weren’t also supported by sentiment, technicals, and fundamentals. That’s certainly the case with gold today. An imminent breakout from a massive bullish falling-wedge formation is buttressed by bearish sentiment and deeply-oversold technicals which are both powerful contrarian indicators, and huge room for fundamental buying.
Another bullish secondary factor that can be added on is seasonals. Gold is entering its strong season, enjoying sequential big autumn, winter, and spring rallies. During the 22 of these last 25 years where gold was in bull markets, these averaged impressive 5.5%, 7.9%, and 4.3% gains! I wrote an essay a couple weeks ago updating my old seasonals-research thread and analyzing in depth what they mean for gold today.
Like usual the biggest beneficiaries of a new gold upleg getting underway soon will be the gold miners’ stocks, which amplify gold’s upside due to their earnings’ big inherent leverage to their metal. The bottom line is gold’s drawdown price action over this past half-year has coalesced into a massive falling wedge. Defined by converging downward-sloping trendlines, these reflect waning selling pressure gradually yielding to increasing buying. They usually resolve in strong upside breakouts proportional to their sizes. Gold’s huge falling wedge is almost mature, coiling ever tighter which will soon force a breakout.
Gold’s bullish falling-wedge chart pattern alone isn’t enough to compel aggressive buying. Yet supported by bullish sentiment, technicals, and fundamentals, it adds to the case gold’s next major upleg will soon be underway. The more bullish factors aligning after a long and deep selloff, the greater the odds it will soon reverse. As gold’s falling wedge yields to a decisive persistent rally, battered gold stocks will soar.
