The rampaging golden bull

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”.

Monthly Charts
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.

Quarterly chart of gold - note the parabolic rise in the '70's compared to the straight trend of this decade

Zooming in to a six year timeframe provides a closer look and captures the start and finish of bull and bear markets.

I’ve added my preferred indicators to this chart:

  • weighted 260 day moving average (pink line)
  • 12 month Twiggs Momentum Oscillator (bottom panel)

A rising 260 WMA indicates a bull market – note how this was punctured by the monthly price during GFC Episode 1 as gold fell from nearly $1000 USD an ounce to just over $700. The 12 month TMO measures the rate of change in price – a reading above 20% is a sustained bull market.

Current activity is clearly bullish and has been since the 2009 lows, with sustained momentum (notice rising trendline).

Weekly Charts
Zooming in to 1.5 years using weekly candlestick charts (the candle “body” is the open and close, the “wicks” are the extreme highs and lows. A blue candle means an up-week, a red candle and down-week) I’ve drawn a trendline from the low of the correction in gold in 2009.

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.

Daily Charts
Finally, the daily charts – representing the ongoing battle between those trading the “noise” of the market.

Here I’m using daily candlesticks, with a 15 day moving average smoothing out the intra-day trading action (pink line), with the 260 day WMA below (grey line). The horizontal orange line representing the intra-day high of $1575 on May 2 shows how the recent price activity is JUST below. In trading terms, this is called resistance – a ceiling to which prices try to break through (the inverse is support, a “floor” on prices).

The 10 day Directional Movement System shows the bulls are in control (rising blue line) with directional strength rising (rising grey line). Again, more evidence of a bullish bias continuing.

A note on patterns: if the gold price does not CLOSE above this resistance line, a double-top formation will occur. Note in the weekly chart above how gold has a propensity to form double- or triple-tops as traders try to push the shiny metal to a new higher level, but are rebuffed (I’ll let the conspiracy theorists try to explain why). These “failures of resistance” can turn the market around and since 2009 have provided savvy gold-buyers an opportunity to load up when the price falls to support – the weekly trendline or the 260 day WMA.

Having said that, my favourite commodity trader, Peter L.Brandt– who only trades patterns (I use technicals only, others use macro/fundamental analysis), notes 2 patterns to consider.

The weekly graph displays the sustained bull trend in Gold. This trend remains intact.

The daily graph displays a clearly defined 10-week symmetrical triangle. This pattern should be bracketed in the December contract with buy stops above 1565.1 (intraday) or 1556.1 (close); and with sell stops at 1476.4 (intraday) or 1486.4 (close).

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

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    • Thanks JC.

      My favourite chart is still the second – the quarterly bar chart going back to when the gold window was closed.

      The parabolic rise in the gold price in the 1970’s showed a bubble – and required Paul Volcker hiking up interest rates to massive levels.

      The current bull market in gold is not at that stage – and I can’t see The Bernank trying to appreciate the USD any time soon.

      • That was no bubble, that was just a pause against the USD. Gold has never been in a bubble in its history. What we are seeing in the chart, is paper money going to zero in value

        • Well said Jack. The speculators don’t mind picking up pennies in front of steamrollers though.

          I’ve read that some fool actually stayed in the twin towers in New York, buying ‘puts’, or is that putz?, on airlines. He made out like a bandit, for a few minutes….

    • ps. That hourly chart is seven hours old now. Spot gold has since declined to 1565. A completed throw over of the steep up trend channel is on the table as an option, and if that’s confirmed, down we go. Have to wait and see.

    • Thanks Avid – I actually thought about putting that up.

      Wish I had time to day trade gold again – its my all time favourite – and you could do it 22 hours a day….

      If gold breaches the upper channel on the monthly chart, it will be in a bubble.

      • I have got a feeling that the next leg up will be when Gold turns bubbly. Don’t have any charts to support that, just gut feel.

        I’d be surprised if that next leg up is starting now. I expect a deeper retracement on the long term charts before we get another big move.

        BUT I imagine many people would be similarly surprised, and one of my favourite definitions of a market is “that which makes a fool out of the maximum number of people”…. so in a way, I wouldn’t be surpised.

        All we can do is keep our eyes open and hope that we see what’s happening well enough, to act on it profitably.

  1. Thanks prince. This is likely to be bit of a green question and not totally relevant to your technical/trend analysis, but is there any information as to what extent new debt leveraged ‘products’ now feed into the current gold price.

    Is this the basis for calling a fall in the gold price if there’s a credit crunch mark II?

    • There is a lot of literature about the impact of gold ETF’s on the gold market. Most gold traded is done so on modest leverage and most investment ETF’s are unleveraged – so primary debt on gold is not an issue.

      But there is another point and that is the physical market is not very deep at all – most sophisticated investors have no gold at all, and gold is not a large proportion of any fund (except maybe the University of Texas), or indeed central bank.

      Let me clear though, gold is susceptible to financial bubbles like everything else – it has bubbled and popped throughout history. And there is a huge difference between physical gold and paper/electronic gold, but that;s for another day…

  2. As one of those who panicked out of a lot of gold and silver during GFC 1, I have only traded cautiously since. The reason is that no-one was anticipating a fall in gold. Just like now.

    That said, I have kept my buying line to Perth Mint open and am ready if GFC 2 eventuates and gold is sold by many to cover other losses and margin calls again.

  3. Good article Prince.

    The link below shows that Ben has the door open to more “monetary policy accommodation”.

    It’s hard to know what will happen with gold as it’s such an opaque market. The new Chinese version of the COMEX has insiders excited as it will make it difficult for the shorts on the COMEX. Additionally, if you look at the COMEX Depositary warehouse [registered stocks] it’s dropping. Mid 2006 COMEX had approx 5.3Moz of gold, and now as of 11th July it’s 1.58 Moz.

    It was explained to me by a trader that sales of ETF shares that demand physical is the main cause. A lot of the flow of physical gold/silver from ETF sales is to Asia he said, but also to Europe and Russia. Again, because of the opaque nature it’s hard to verify.

  4. I’ve just been told that the Pan Asian Gold Exchange (PAGE) won’t have much effect of the gold market. More disinformation that the gold market is full of.

  5. No need to buy gold, you cant shop with gold stick to the paper fellas.
    its for barbarians.

    • Do you know why BIS, and a lot of the central banks are buying gold? The IMF G20 paper put gold in a basket for an SDR currency so something is happening on the gold front. I just don’t know what. Like you I doubt if they would ever go to the gold standard or anything like it. It’s too hard to print what you don’t have.

    • Yeah I’ve seen that paper – the 21st century Bancor may have gold as one of its constituents.

      You can still have a credit based monetary system with gold – as the private bankers will not be constrained, whereas central authorities would be (to a point – they could still use SDR’s etc).

      There is a massive impediment to going back to a gold bullion standard (and almost impossible to go to exchange or specie only versions) – the main reason being academia/neo-classical ideology AND paradoxically a misunderstanding by Austrian leaning types who think that the gold standard will fix everyones ills (e.g 100% reserve requirements).

      What is actually needed is reform of the banking system FIRST – by changing the format of banks themselves. i.e increasing robustness by diversifying banks into smaller, fail-able institutions, with specific lending practices that focus primarily on entrepreneurial/business finance.

      Monetary reform should come after that (reducing fully floating currencies (but not restricting free exchange of currency) is one good idea) – but there is no point going on a gold standard – or adopting MMT – if you still have TBTF banks…. (for evidence I point to something called the Great Depression and The Lost Decades respectively)

      • Interesting stuff Prince. Lots of big issues to resolve, but no one seems to be up to the challenge. I’ve followed Soros’s INET, and the IMF research papers, but to me not much changes and the fox is still in charge of the chicken house. Like I’ve said before I wonder how many politicians and bankers have read “This time is different”. Nothing has been learn’t IMO.

        I’ve done research on bullion banks, central banks, and the flow of gold, and it’s used in swaps, and leasing, so it’s not the barbarous relic some would have us believe, and if it was why does the BIS/CB’s accumulate it? It clearly has a role other than a commodity.

  6. “…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”

    Be also interesting to see how far south the Aussie $ heads.

  7. Well Mad Adam has come out has a gold bug:

    On the debt side, US treasuries pushed higher because they are a safe haven! Personally, I wouldn’t touch them. Gold, bunds and Aussie bonds is it for mine.

    Silver looks good here too.

    I’ll follow up this analytical post with a post on how to trade gold (and silver). If QE3 does eventuate, it will be a medium term trade with scaling (pyramiding) opportunities on the dip.

  8. stick to the paper money, the gov can add an xtra zero on the 100 note, like magic you made 900, whats not to love?