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 .

Our recommended articles for today

Japan has a new partner in Asia – here’s how you could profit

Japan has launched a charm offensive to win over its Southeast Asian neighbours. That could lead to one of the greatest investment opportunities of our time, says Lars Henriksson. Here, he picks one of the best ways to profit.

What you can learn from freaks of nature

Biotechnology has opened up a whole raft of exciting opportunities for investors, says Tom Bulford. Here, he looks at one stock that could be about to transform what you eat.

34 Responses

  1. 16/01/2013, Reality Check wrote

    The evidence for the bull to me seems almost impossible to ignore.

    To those who argue that gold is finished as an investment point to all the stimulus measures that have been introduced throughout the world during 2012 and the lack of price action that followed in PMs from this news.

    For me gold is ultimately money and therefore also currency. Currency markets react usually to events way faster than other markets do. The big movements from 2009 – 2011 were in anticipation of the money printing we are seeing today. It was predicted by serious PM buyers much sooner than the FED or the BOE ever even hinted at it. The big blow off at the end of 2011 in the price was the last of the “soft money” coming in at the moment realising that QE had in fact still further to run.

    The next big driver will perhaps be price inflation, who knows?

    Just look at what certain sovereign nations are doing with respect to PM’s and you can see this story has not even really begun yet.

  2. 16/01/2013, Patric wrote

    We must bear in mind that currently the price of gold is really based on a highly leveraged paper bet on gold, not the demand for physical commodity itself. If this price were to fall, either through lack of confidence or engineering, this would certainly be upsetting in the short term, but at some stage confidence would return to an un-leveraged, non-hypothicated commodity.

  3. 16/01/2013, Cooldude wrote

    Nick Laird is correct. Big move on the way with an even bigger move in silver. The Bundesbank are looking to repatriate their gold. China is increasing their reserves by 1000 ton per annum and can’t get enough of the stuff. This will be big and in all debased currencies.

  4. 16/01/2013, porkydawky wrote

    Bear in mind gold mining costs are increasing year on year and coupled with decreasing grades of ore in new discoveries this will only accelerate. There is a very small probability that any companies would mine gold at your lower estimates. I know few would sell at such levels!! In fact if crude continues to increase then the POG will rise inexorably.

    In order to take account of all costs and overheads associated with the production cycle, Thomson Reuters GFMS use a proprietary measure of ‘all-in’ costs, which they estimate rose 22% in 2011, with the global average total cost of producing an ounce of gold standing at US$1,044.

  5. 16/01/2013, Porkydawky wrote

    BUBA wants it’s gold back from Godfather FED. The cracks are starting to appear. Hold onto your phyzz!

    “There is a very interesting document from this period, a letter from Sir Austen Chamberlain, who was then Foreign Secretary in London, to M. Poincaré, who was Prime Minister and Finance Minister in France; it must be of 1928. Sir Austen said, “We know that you are entitled to ask gold for your sterling, but in the frame of the close friendship between Britain and France we ask you, so as to avoid trouble for the City of London, not to do that.” And we were, I must say, weak enough to comply with this request and not ask for gold. (J. Rueff, “The Monetary Sin of the West”, 1972)

  6. 16/01/2013, Max Stirner wrote

    Technical analysis is a lot like astrology. If you believe in it you can always find an interpretation of events that confirms that it works. This is just how our brains work. You can find this way of thinking already in mice. However, the reality is that a method that cannot reliable predict the future, like astrology is rather useless. At very best technical analysis is a self fulfilling prophecy.

    Here is what you need to know about gold. They are printing money and they cannot stop doing it, because their house of cards would immediately collapse if they did. At some point gold will simply be the only currency left standing. And this remains true, no matter which imaginary line gets crossed on a chart.

  7. 16/01/2013, Porkydawky wrote

    MFG
    PFG

    The paper price could easily go to zero. However central banks are buying the phyzz hand over fist.

    Best that establishment can hope is to “control” the rise in value of the anti dollar.

    Commodity price increases = inflation. Therefore control over this market is critical for western govts. if they wish to continue the fiat ponzi.

  8. 16/01/2013, Bob wrote

    I am sorry but all I read in this article is that gold could soar or that it could crash. Did I miss something?

    Looks like JP Morgan and GS have had a good quarter – would not surprise me for them to turn their attention to gold and silver and drive the price down a bit now.

    They had their fun with Apple this week and it is time to chuck out all the gold and silver bulls who have bought on margin or who have nervous stops just below current prices.

    Lots of people with Apple stops just below 500 got creamed last night. More will get creamed when Apple options expire this Saturday.

  9. 16/01/2013, heatonfan wrote

    Very good article Dominic, both in terms of the gold story and on technical analysis. Bob (8): it takes two views to make a market, or we would all be very rich already.

    Technical analysis is a tool of analysis not a magic bullet. Those who think it is a magic bullet are those who wipe out their spread-betting accounts! I find it very useful where gold is concerned, especially using basic tools such as support and resistance and trendlines. The next few months look to be critical.

    To really annoy the sceptics of TA, may I point out that the closing price bounced off (with a Doji candle a few weeks earlier) the 61.8% Fibonacci level of the break from 1564 (22.7.12) to the high of 1795 (30.9.12) on week ending 30.12.12! ;-) but correct and potentially significant.

    My lins in the sand is $1530. If the price closes below that, I am selling my non-physical holdings.

  10. 16/01/2013, Bob the electrician wrote

    May I ask some somequestions? I would like to know what the effect of the Bundesbank repatriating its gold bars will be.
    Could there be a time when governments like the Bundesregierung
    feel they have enough gold bars and don’t want any more reducing the price? Production methods are increasing in scale and efficiency. less than a hundred years ago people were panning for gold and collection it in sheepskins and refining it by amalgamation it with mercury and boiling the mercury off with a potato. Will the number of gold mines and their size eventually reduce its price?

  11. 16/01/2013, Phil wrote

    Gold is a very emotional market and forms repeating patterns as traders buy and sell with a herding mentality. It is very tradeable using TA. However, of course you are only dealing in probabilities.

    The way I see things at present, the bulls are gaining the upper hand as the bears fade. The price is pushing hard on the 200 and 50 day exponential moving averages which are almost conincident. Today the bears have tried to push the price down as it hit these ma’s, but the move is weak. I would expect the price to retest these levels in the next day or two. Those who are short are very likely to have buy orders just above there and so a pop to the upside is likely.

    But I could be wrong!

  12. 16/01/2013, charles todd wrote

    silver is the best bet it will go up a lot more than gold will

  13. 16/01/2013, grisly atoms wrote

    Although I can understand why some folks don’t accept technical analysis, I do notice repeating chart patterns that usually lead to the same result. [But not always, otherwise all technical analysts would be rich!]

    All you need to know, though, is that in the thousands of years of human history, all fiat currency systems have failed due to government overprinting leading to hyperinflation. Gold will be used as money again, and soon, when the Keynesian nonsense used by policy makers fails again.

  14. 16/01/2013, Aff wrote

    Enjoyed reading this article, thanks.

    I feel Gold will do well and I struggle to see how it can be in a bear market. However there is Gold and there is paper gold. The price we watch is heavily bent downwards by leveraged paper gold. It may continue falling if people lose faith in the paper.

    Silver to me seems like a rocket waiting to take off. Call me a conspiracy theorist if you want but it is much more heavily manipulated below its physical worth than gold is.

  15. 16/01/2013, daisy42 wrote

    Worth considering the real (i.e. inflation-adjusted) prices of gold in GBP? See http://www.retirementinvestingtoday.com/2012/08/gold-priced-in-british-pounds-gbp.html

    It looks to be at the top of its range on this basis.

  16. 16/01/2013, jackanory wrote

    The bundesbank is bringing home all its gold.

    Is Germany in the lome of its elections preparing to leave the Euro?

  17. 16/01/2013, Colin Selig-Smith wrote

    There are inflation signals all over the place:

    Horse meat in burgers,
    Beer being watered down,
    Arabica coffee beans being switched for Robusta in household brands.

    The CPI is telling lies.

  18. 16/01/2013, The Viking wrote

    Always like your comments. I was reading a report indicating that US$ will be replaced as the reserve currency and replaced with a currency by an expanded version of SDR and to be expanded to include the Yuan and possibly other BRICS currencies with some indirect backing by gold. Is this possibly true why a number of central banks are buying gold ?

  19. 17/01/2013, Washburn8992 wrote

    Dominic- Shame. It could be over for gold ?! Give us a break ! Patients is a virtue. The safest asset on the planet- US treasuries, being manufatured at 1 Tn extra per year. Once or twice a year I add to my gold. I don’t look at charts or the news, just listen to my friends and watch all my bills go up.

    Gold is what remains of our sanity, I have no plans to exhange mine for the reassurance of Bernanke anytime soon.

  20. 17/01/2013, Chester wrote

    Gold is probably in significant correction mode, and after another stab up, prices should consolidate around $1530. What happens then? Another view is that it reverts back to below $500, which seems just as likely as any more bullish scenario. Why? It is a crowded and emotional trade, which should see rapid price declines once the $1530 level is breached

    Gold is collateral, not money. It should be money, and will be again, but it could take some time for that to become a reality. In the meantime, a more profitable play is the US$, which is cheap and should benefit from the next wave of panic and deleveraging. Buying gold at below $500 once the US$ has topped out makes some sense

  21. 17/01/2013, CHATAWA wrote

    suppose the price of gold shot up to 3000.It will deregulate the whole financial system and lead to a major crisis.I just think gold will slowly go up with major retracements from time to time.It is true that people are looking and dreaming of a big killing.Beware!

  22. 17/01/2013, tuesday wrote

    The most significant part of this speculative piece is the first sentence: “This frustrating period of going nowhere continues for gold ..” You have an emotional investment in the stuff and are frustrated because it doesn’t behave as you feel it should. It’s not fair goddammit! Especially when you have ‘put your neck out’ (your words) so many times.

    I honestly think John Burford is the only person at Moneyweek who talks rationally on this subject – by being neither bull nor bear.

    It is very apparent from the last two years that YOU DO NOT KNOW WHAT IS GOING TO HAPPEN! Stop selecting data to back up your wishes.

    The arguments about inflation, money printing etc have been made many many times. All very rational but as ever the market decides differently. When the conspiracy theories start then you know someone is clutching at straws.

    (I own some gold by the way)

  23. 17/01/2013, 247Bull.com Editor wrote

    Thanks to rising production costs the total (all-in) cost of mining an ounce of gold across the industry is now around $1,300. And for some producers it’s considerably more. It costs Gold Fields $1,788 to produce an ounce of gold.

    Rising production costs have therefore put a floor under the physical price of gold at around $1,300: http://bit.ly/Tab0Wg

  24. 17/01/2013, Reality Check wrote

    #20 Chester
    Gold back to $500 an oz.

    What a dream that would be. Can you honestly look at the fundamentals and say with any kind of credibility that is even remotely realistic? As has been pointed out, mines will simply shut down long before the price could ever fall that low. For that to happen you would need to see oil trading at $30 a barrel. and a huge price price and wage deflation in the US (This goes against Bernanke’s religion I am afraid!).

    I would love to see gold at that price if only so I can stack up more than I would ever dream of. The Chinese would also love it too.

    Keep dreaming!

  25. 17/01/2013, Pixel8r wrote

    Gold isn’t an investment it is a wealth protector. Have faith and you will be protected.

  26. 18/01/2013, Ed wrote

    what about improving american economy, improving housing market, cheap domestic energy, rising dollar, rising interest rates,
    What will this do to the gold market. Also watch programs like jungle gold etc and am horrified at the destructive mining that takes place to extract this useless metal

  27. 18/01/2013, Colin Selig-Smith wrote

    Gold going up is bad news.

    Even if you own gold.

  28. 18/01/2013, Mr Au wrote

    Thought I’d share this: topped up on a few more gold coins over the Christmas holidays via coininvestdirect.com but still haven’t got the coins. When I called yesterday to chase up, was told that they were inundated with unexpected orders over the last few weeks. They’re running double shifts trying to clear the backlog … sounds like the bubble is over?

  29. 18/01/2013, James wrote

    Dominic,

    Why don’t you share with your readers whether you did in fact place a “huge leveraged bet on gold” and, if you did, how it has been working out for you over the last couple of months…

    See you article of early November:

    http://www.moneyweek.com/investments/precious-metals-and-gems/gold/dominic-frisby-a-huge-bet-on-the-gold-price-61300

  30. 21/01/2013, Chester wrote

    @24 – exactly Reality Check. You have identified the one scenario almost no one believes will unfold in this tragedy of unintended consequences

    Time will tell, but shorting gold by holding US$ makes sense. In 2008 credit money collapsed, but gold didn’t go stratospheric. It fell as the US$ rose. QE efforts have multiplied exponentially since gold hit its record high, but prices are falling, not rising in response

    This next leg down in asset prices should be bigger and more severe than 2008, so gold at $500 is just as likely as any bullish scenario. Remember also that oil hit $40 from it’s all time high in 2008 as speculative money fled commodities, so $30 is a real possibility this time round

  31. 21/01/2013, Boris MacDonut wrote

    Gold is down 4% since 1st Feb 2012.

  32. 23/01/2013, Aff wrote

    @Boris

    Gold is down 4% sinceFeb 2012! So what?

    You can just as easily say Gold is up about 4% if you measure from May 2012.

    You’ve picked one of last years highest peaks to measure against

    http://www.getbig.com/boards/index.php?topic=455343.0

  33. 24/01/2013, Boris MacDonut wrote

    #32 The DOW commodity index tends to look at values on an annual year to date basis. Gold is down 3.7% since 1st Feb 2012.

  34. 08/02/2013, Confused wrote

    I can buy the argument that mass money-printing will ensure gold prices have further to go (and given that a significant chunk of my portfolio is in gold, i bl**dy well hope it does!) but can someone explain this stuff to me? What statistical evidence is there in support of any of this analysis?

    Why does drawing a trend-line predict future prices? And marking the bottom of an inflection point, is this not post-rationalisation in its purest form?

Commenting on this article closed

MoneyWeek magazine

Latest issue:

Magazine cover
A new lease of life?

The drugs transforming old age

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

FREE REPORT:
What you should really do with your money (2014 Edition)


How to buy and sell penny shares

A beginner's guide to investing in gold

How to invest in British fracking