With gold almost rising to a new all time high in USD per ounce (Europeans get that tag for today) it’s time for another close look at the shiny metal. This will be a technical and chart heavy look at gold from a fractal viewpoint – i.e from the very long term (secular), then long term (cyclical), medium term and finally the “noise”.
Where does gold stand, in mid 2011, in historical terms? As the first chart below shows, gold experienced a bear market from 1996 to 2004, trading below $400 USD an ounce.
Since 2004, or more rightly, 2001 (which was also the beginning of the Euro and US secular bear stock markets), gold has been in a major bull market, with the monthly price inexorably rising within a contained trend channel.
Compared to the gold bubble of the 1970’s, the current price is not (yet) running away.
Zooming in to a six year timeframe provides a closer look and captures the start and finish of bull and bear markets.
Note how the weekly price has touched this trendline of four separate occasions, indicating there is a cyclical element to the ongoing bull market, with a reversion to the mean (the main trendline) when prices become frothy. The run up due to the announcement and subsequent implementation of QE2 is clearly evident, with a stall in prices as The Bernank turned off the (electronic) presses at the end of June.
Gold reached a new high (noted with the horizontal orange line), in early May, which is now being “threatened” as the whiff of QE3 is in the air.
A technical look at this recent action re-introduces the 260 day WMA (grey line) and my favourite secondary trending indicator, the Directional Movement System. In plain English, the DMS comprises 3 lines – the blue represents the strength of positive direction, the red negative, and the grey line is an index reading of direction itself (called the ADX).
The current reading is clearly bullish and rising, but not as strong as recent “take-offs” in February this year, or August 2010. A breakout above the recent historic high with an uptick in the ADX (the grey line) provides a very bullish case to a new rally in gold.
Finally, the daily charts – representing the ongoing battle between those trading the “noise” of the market.
What Peter is saying is a variation on the resistance break theory: traders are likely to go long gold if it breaks to the upside at $1565 (during the day) or closes above $1556. I would prefer to see a close above $1575 for a sustained trend. Note that Peter is also cautioning a break to the downside – which could occur if the US debt ceiling ruckus is not resolved (or any number of ongoing crises in the Twilight Zone, err, EuroZone)
If gold continues its long term secular bull market, the target for the end of 2011 is approx. $1600 to $1700 USD an ounce. A rally on the back of QE3 could reach the upper side of $1700 (depending on the size of the QE’ing), although I agree with Peter that the likely target is approx. $1650 or so.
I prefer not to set targets, as I trade with the trend, but its also worth noting that any liquidity crisis and subsequent US dollar rally (e.g GFC Episode 2 – the Debt Strikes Back) could see gold drop to $1300 or less, in a similar scale to its fall from grace during GFC 1.0