Where now for Gold?

Spot gold in USD broke a recent high last night, after comments by the Fed chief Ben Bernanke, that milky-wilkies (QE3) are off the table, but will continue its zero interest rate policy (ZIRP) due to the slowing US economy.

Gold jumped to $1559.50, before being sold off (which has regularly occurred whenever an intraday high of $1550 has been breached) to settle at $1549 at the close of metals trading.

3 day chart of gold - green line is most recent trading day

Although almost always reported in USD, gold jumped to a new record high in Pound Sterling (GBP), closing at 964.20 an ounce.

Gold in GBP per ounce - from www.goldprice.org

Similarly, gold in EUR has also hit a record high, closing at 1080.40 per ounce.

Gold in EUR - from www.goldprice.org

But back to gold in USD – where is it heading?

I’m going to lean on the shoulders of a very successful classical chart trader, Peter L.Brandt, who has recently taking up blogging and who recently published his book on trading – “Diary of a Professional Commodity Trader“. I’ll be publishing a review of this book soon (probably next weekend).

Here is his short term take on the gold price:

Symmetrical triangle should launch the next $100 move

As often is the case with classical charting principles, well developed chart patterns can provide either a buy or sell signal. In fact, a chartist has to critically question any chart pattern that does not offer either option. Such is the present case with the daily continuation Gold futures chart ($GC_F).

daily bar chart of gold, as marked by Peter L.Brandt


Three major chart events can be seen on this chart.

  • The April 5 completion of a 5-month continuation inverted H&S pattern. This pattern had a target of 1584 — the high on May 2 of 1577 was close enough to count as achieving the target.
  • The May 5 and May 17 retests of the neckline of the previously completed H&S pattern.
  • The ongoing development of an 8-week symmetrical triangle.

This symmetrical triangle could go either way. A close above 1555 would complete this triangle as a continuation pattern and establish a target of 1650.

The problem of course is that gold (in pretty much every currency) has been rising inexorably year-on-year for over 10 years, so trying to time an entry for going long (or longer) seems fruitless. Just buy buy buy – right?

My monthly chart system shows the current position of the gold price against its historic bull market. The chart below shows monthly candlesticks (a blue candle indicates the price closed higher in the month, the red candle shows the price closed lower – the “wicks” provide the extreme highs and lows) with a linear regression channel going back six years, encompassing the terrible volatility of the GFC (where gold dropped from almost $1000 per ounce to just over $700).

click to enlarge

I’ve also included a momentum indicator (Colin Twiggs TMO) where a positive reading obviously means the rate of change of prices is rising, but a reading above 20% and climbing is a secular bull market.

The $64,000 per ounce question is, even if price action and charts are pointing, in the short, medium and long term to higher prices, how do we know if this will continue to the next year and thereafter? Given, that adjusted for inflation, the gold price needs to rise to over $2200 per ounce USD before reaching its previous high, I would suggest two things to watch: first, a break of the lower trend channel line on the chart above (a fall below approx. $1300 before the end of the year) and secondly, if prices breakout and go exponential.

Quarterly chart of gold since it was floated in 1975

Note the classic run up in prices – a true bubble – in the late 1970’s. A break above the upper trend channel in my chart above does not bode well for the relatively smooth price action in gold that is contended by all (except perhaps Michael Pascoe) that gold will inexorably rise.

Disclosure: The author is full time trader and may hold long or short positions in some or all of the securities mentioned in this article. The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

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Comments

  1. You’re having a prolific day, Prince!
    The market action within Brandt’s symetrical triangle looks more to me like an initial thrust down (in May), and then an upwards correction against that thrust. Which would imply another thrust lower soon, perhaps to test the neckline of his inverted Head and Shoulders.
    I agree with your big picture assessment… doesn’t look like a bubble.
    There are better trading opportunities elsewhere at the moment, AUD/USD and ASX SPI 200 both bounced off big trend lines overnight.

    • Gold is its entire history have never been in a bubble, the trend in of the 1970’s in USD was not bubble. I suggest you turn the charts upside down and label them fiat paper. All currencies return to their true cost of production, the value of the current digital money is zero. Bubble watching with gold is a complete waste of time. You are better off guessing how many ounces of gold will it take to buy an average home in Sydney after the next GFC. In 1980 its was about 65oz, currently its over 450oz. My guess it will be less than 10oz

  2. Since gold is about 1% of investment products globally it’s hardly a bubble IMO. Also as Central Banks have it, loath it, but still use it for swaps, and leasing it does generate some revenue. However, of late the Chinese, Russians, and others have been net buyers. There is alot of talk lately of a new monetary system linked to gold, and not the old gold standard, but gold none the less.

    Gold is a big story, but it’s one of the most opaque financial issues so due to the lack of transparency so it’s hard to know what’s really going on.

    Also, to chart it does not show much IMO other than the market regulating the price, but it’s largely driven by fear, and that’s why it would jump if we saw a few EU countries default, which seems unlikely now. The US just don’t want to see that happen yet, but at some point conditions might see a total loss of confidence in the Euro, and USD; then gold is likely to surge until stability can be maintained.

    There are so many so called experts in the gold story, but there are few who really know what’s going on with the Bullion Banks, COMEX, OTC, and Central Banks for that matter. The famous Ron Paul trying to audit the FED’s gold only to find out they only have an accounting entry and gold certificates, and it’s the US treasuries who own the physical; he should have know the FED didn’t have it, and that is quite embarrassing for him IMO.

    Gold is money and a store of value, but it’s one of the most regulated COMEX items.

  3. What is the likelihood of gold falling below $1300 before the end of the year? It may be worth waiting to buy.

    • md,

      No one really knows, but one of the possible outcomes is that when QE2 ends and the feed through effects cause the market concern regarding risk, we could see investors returning to USD via US Treasuries etc.. In general commodities could “fall” (gold being one of them even though it’s viewed differently by some) as investors move from commodities to Treasuries.

      You can already see the US indices falling since mid April and that could be the market unwinding from stocks in preparation for QE2 ending.

      My view is that you can’t predict what the markets will do. George Soros sold his gold, but it was an ETF, and if you read all the counter party issues with an ETF (even though the fund might own physical gold would you be able to get it in a crisis); is the gold ETF what you want in a crisis? George brought gold stocks and his organisation would have a DMA terminal so maybe exit via DMA is easier than an ETF??

      There is a lot of debate currently about gold stocks not performing when gold in general has gone up. Some analysts say that ETF were seen as a better vehicle, but George Soros has shown that now he doesn’t. Also, with George Soros look at what he does, not at what he says, so in my mind that is a vote against ETF’s rather than gold.

      As I’ve said the gold industry is very opaque and not many people really know what they are talking about has been my experience.

      I don’t claim to be an expert at all, but have studied it as part of my economics studies, and know to be cautious. Anyone who predicts gold IMO might have a hidden agenda.

      I hope that’s of some use.

  4. Its not uncommon within this gold bull market to correct itself by at least 20%. So indeed $1300 is quite a distinct possibility – but i doubt it would sit there for long. There is also the likelyhood of a grinding stagnation consolidation for a significant period of time with many false dawn rallies and pathetic sell offs.

    The probabilities of a stagnating correction is limited, as now the amount of global capital moving into Gold.