Every gold investor should watch these numbers like a hawk

This frustrating period of going nowhere continues for gold investors. 2013 continues in the vein of 2012.

In the past week we’ve had a nice move from below $1,630 an ounce to $1,680. But that only leaves us flat on the year. Gold is being left behind by other markets.

Can we expect more of the same for the rest of the year?

The repeating patterns in gold’s bull market

Let’s start with a long-term chart of gold since 2001 (below), and a reminder of my big-picture theory.

I’ve drawn two red tram lines around gold’s fairly orderly run up. Within this, you can see that gold has displayed a repeating pattern. I have idealised this with the dotted blue lines.

Gold makes a move up, then enters a period of consolidation, during which it is essentially flat. The period of consolidation tends to reflect the previous run up in both duration and magnitude. In other words, if gold has a spike up, as it did in late 2003, April-May 2006, early 2008 and summer 2011, it will have a corresponding spike down.

Looking specifically at the period from 2009 to 2011, you could interpret this as one big run-up – as identified by the dotted green lines on the chart. If this is the case, then our consolidation phase has further to run.

Gold price since 2001

(Click on the chart for a larger version)

Alternatively, you could split the period into two distinct run-ups. You could argue that we had one surge in late 2009, followed by a consolidation in early 2010. The next run up began in the latter part of the year. I have shown this with blue dotted lines. If this is the case, our period of consolidation should now be drawing to a close.

Welcome to the rather arbitrary nature of technical analysis!

What happens next?

I want to zoom in now and look at the last two years. I have marked the range of gold’s consolidation. The red line is resistance. The amber line is support.

 Gold price - last two years

(Click on the chart for a larger version)

I’m not going to pull any punches here. As long as that amber support zone is not breached, my theory that we’re in a consolidation phase remains valid. If the amber zone is broken to the downside, then it could very well be game over. I see that $1,500-1,520 support zone as that critical.

For now, we are in an intermediate-term downtrend. This began in October. I have defined this with the two blue tram lines on the chart above. The moving averages (MA) are pointed lower too, which adds further evidence to the bear case.

If you look at gold against sterling, as the chart below shows, the picture is the same: a range-bound market, with an intermediate term downtrend in place. 

 Gold price v sterling

(Click on the chart for a larger version)

There is resistance at just over £1,100 an ounce and support in the £960 to £1,000 zone. A break below, say, £950 and it could very well be game over. It beats me how it could be game over for gold against sterling, but, hey, I’m just a bod. My opinion counts for nothing. It’s all about the ticker.

On the positive side, however, gold yesterday broke out to multi-decade highs against the Japanese yen. Unless you’ve been hiding in a bunker (perhaps the wisest place to be) you will have heard that the yen has been on a Bank-of-Japan-inspired plunge in recent weeks. Japanese bullion investors will be glad of their gold. It has and will continue to protect them against the profligacies of their central bank and other policy-makers. (That said the yen must be due a reversal, such has been the speed of the recent move).

Could gold be about to see a massive break-out?

On another positive note, gold data-wrangler Nick Laird of www.sharelynx.com pinged me an email yesterday, which I’d like to share with you. Laird is bullish. He cites a chart pattern from Robert Edwards and John Magee’s classic Technical Analysis of Stock Trends – the consolidation, the break-out, the re-test and then the major run.

Below is the chart Nick sent me. It is of gold since 2007. Take a look at it – then I’ll try to explain the lines he has drawn on it.

 Gold price since 2007

(Click on the chart for a larger version)

Looking first at 2008, you can see the period of consolidation from early in the year as gold fell from just over $1,000 to $680. When gold broke above the two falling black diagonal lines, this was ‘the break-out’. The inverted red ‘V’ marks the re-test.

We then had that wonderful, two-year ‘major run’ all the way to $1,920 an ounce, as marked by the rising green diagonal line.

Now to the current situation. Laird feels we have had the ‘consolidation’. The move above the two falling black diagonal lines in September 2012 was the ‘break-out’. The inverted red ‘V’  marks the ‘re-test’ – which ended a few days ago.

Next comes the ‘major run’.

Here are Laird’s words: “Theoretically, this buy point is a big one. We did the consolidation wedge from 2011 through to Sept 2012 and then broke out. We have just seen the test of the breakout and, ideally, this now should be the beginning of a new major leg up similar (and bigger) than the one from 2009-2011.

“Last time we went from $700 up to $1,900. This move should be larger and over a shorter time period. This is classic technical analysis, especially over a two-year formation. A breakout will be followed by gasps of surprise.”

Now, as I say, technical analysis can be rather arbitrary. Two people can look at the same chart and offer completely opposing interpretations. To give you an example, here’s the same chart of gold with a blue trend line. Since gold broke this trend in spring 2012, it has gone back to it and failed to get through, signalling a market reversal.

 Gold price since 2008

(Click on the chart for a larger version)

You can see whatever you want to see and argue whatever it suits you to argue. So if you use technical analysis, you have to find a system that works for you.

If it’s so arbitrary, you ask, then what’s the point? Well, the beauty of technical analysis for me at least is that it quickly becomes apparent if your interpretation of the market is wrong. That makes is easier to manage your risk and your money. A move below $1,600 an ounce would invalidate Laird’s interpretation. A move beneath $1,520 invalidates mine and indicates we really are in bear market territory. But a move above $1,800 and the above chart is wrong.

I happen to find Laird’s case compelling. Perhaps that’s because it’s ‘what I want to hear’ – it ties in with my own theory that our ‘consolidation phase’ should soon be drawing to an end. On top of this, I am, after a long wait, getting a buy signal on junior mining stocks, which adds further fuel to the bullish fire – more on that next week, perhaps.

But, as we all know, events have a habit of getting in the way of plans. If they do, let’s hope I can divorce myself from my theories.

Finally, apologies for my miscalculation in Monday’s Money Morning. This has now been corrected. Sometimes even great minds such as mine are unable to count up to a hundred! I will do my best not to let it happen again.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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