Complete Trading Strategy for Gold as Rate Cuts Can Push Price to $2,700 or More

"The trend is your friend, ‘til the bend at the end"

-Unknown

If the trend in gold continues, how high could the yellow metal trade? Goldman Sachs sees gold reaching $2,700 by early next year, based on anticipated lower interest rates and central bank purchases.

I recently explained why gold could go even higher. Now, I’d like to share an actionable plan for trading gold, complete with entry, stop and targets.

Here’s my strategy:

There are two distinct A-B-C-D patterns on gold’s weekly chart. First, let’s look at them separately.

The first A-B-C-D pattern (blue) projects gold to about $2,925. I like the idea of taking my final exit prior to $3,000, which could become a battleground if the price reaches that area. 

Entry would be triggered on a pullback to $2,525 (green), which would occur if gold returns to its recent breakout point (black dotted line).

My stop is located at $2,460 (red). This places the stop below the September 2, 2024 low of $2,471. The trade will be sized so that the maximum loss if the stop is hit is no greater than 2% of the account’s total value.

The second A-B-C-D pattern (black) is smaller, and suggests a less aggressive target price of $2,750. 

Imagine these as two separate trades, with the same entry and stop. Only the targets are different.

Now, add a third target at a one-to-one reward-to-risk ratio. Our stop is $65 below our entry, so we’ll place a target $65 above the entry point of $2,525. This creates a third and final target of $2,590 (orange). 

Let’s put it all together:

Entry: $2,525

Stop: $2,460

Target One: $2,590, Target Two: $2,750, Target Three: $2,925

Let’s add some conditions:

1. Close one-third of the position at each target
2. If Target One is hit, raise the stop to breakeven
3. If Target Two is hit, raise the stop to the former location of Target One

There is one thing that concerns me about this trade:.

The FOMC just cut the fed funds rate by 50 basis points. Here’s why this was the correct move.

Rate cuts mean a slowing U.S. economy. The aggressive 50 basis point reduction suggests the economy is in worse shape than most realize.

A slowing economy is disinflationary. That could be negative for instruments like gold, that perform well in an inflationary environment. 

Gold has gained over 25% year to date, 33% over the past year and a cumulative 67% over the past five years. Much of that gain could be attributed to the worst inflationary environment in over 40 years.

If inflation was instrumental in driving gold to new heights, then the yellow metal might have to continue its journey without that engine. 

At the time of publication, Ponsi was long gold.