Gold’s big decline off our tramline

I monitor the financial media and the blogs to try to catch the mood in the gold market. As I never tire of saying, gold is the most emotional of markets and swings up and down much more on sentiment than on the ‘fundamentals’.

In fact, over the years, I have found that most of the time the basic supply/demand data is so confusing as to be of no use to me in predicting market direction. For those that can benefit, there is a pile of such data available, from mine production data to demand for jewellery to central bank purchases/sales.

At times, of course, we have a major theme that is driving prices. We saw that in the 1970s when inflation was rampant and well into double digits, and investors were buying gold as a hedge to protect their buying power.  That is what drove the incredible bull market that peaked at $850.

And more recently between 2008 and 2011, investors bought gold because they feared inflation as a consequence of loose monetary policy. With so much more money in the system, surely inflation was inevitable.

We are seeing no signs of consumer inflation. What inflation does exist is confined to the financial markets and possibly US real estate (again).

That puts the gold market in a quandary. If the primary reason to accumulate gold is inflation, and there’s no inflation, why continue to hold it when other assets are flying?

What do the charts say?

The last time I covered gold was on 16 January: Is your trading psychology set for success? Then, the market was toying with the upper $1,700 target, which I had in place since early January.

We had a bounce off a major tramline and $1,700 was a reasonable place to suspect a turn.

In the event, the market fell just $5 shy of my target – and this is why:

Gold price spread betting chart

(Click on the chart for a larger version)

I have a superb tramline on this hourly chart with those three accurate prior pivot points (PPPs). As the market made its second attempt on the $1,700 area, it banged into this line, which proved too much for it.

Recall, I had another tramline pair working at the time. This is a wonderful example – when working with tramlines, it always pays to look for alternative lines. This one is truly reliable because of those PPPs – and the overhead resistance from the congestion zone formed from December’s trading.

In any case, in terms of the volatile nature of gold, I reckon my target was hit.

As you know, I am a long-term gold bear and so wish to trade mostly from the short side – and this was just the excuse I needed!

But is my new tramline really reliable, despite proving its resistive credentials here?

I believe so, and this is why:

Gold price spread betting chart

(Click on the chart for a larger version)

I can draw my upper tramline passing through the significant November high, and I can draw the lower tramline across the significant early January low! The lines are equidistant, as required.

How’s that for precision? How did the early January plunge know when to stop at my tramline (that I had not then drawn)? Recall, it also stopped right on one of my long-term tramlines (see 16 January post). That price, $1,626, is very significant. And markets have memories – sometimes, very long ones.

Our next target

OK, the market backed off from the $1,700 area and a short trade was indicated on a break of the minor lows (pink bar) with a protective stop just above the recent high.

The target is then the lower tramline around $1,640 (green bar).

I have placed the Fibonacci levels on this year’s rally to give me an idea of either pausing zones, or places where the market, if it so wishes, is likely to turn.

Trader tip: When you see such a situation as this, where a rally (or dip) is followed by a dip (or rally), get your Fibonacci tool working right away. Then, you will have your price levels to watch for possible bounces or reversals. Being prepared is much better than being surprised!

Note that the market last week paused at the 38% level before falling to the current 50% level – a typical support level.

One of the most important tasks in tramline trading is to go back in the chart in time to see if there are any more touch points (or PPPs). If there are, you have a very significant set of tramlines.

This is the result of going to the daily chart and doing just that:

Gold price spread betting chart

(Click on the chart for a larger version)

Right away, my lower tramline extended back passes right across the multiple lows last summer! That is very gratifying.

Trader tip: Perform the same task on all of your charts – just go back in time to check for more proof that you really are working with reliable tramlines.

Also, I have applied the Fibonacci levels to the entire rally from last summer to the October $1,796 top.

And right away, we see that the early January plunge low to $1,626 was turned right at the 62% level. Yet another reason, in addition to those I mentioned above, to suspect this is a very critical level for gold.

Breaking this level should be highly significant – and is likely to herald a move towards my major $1,500 – $1,530 target area eventually.

But, what are the options in the near-term?

We are mid-way between tramlines and eating into chart support.

If the centre tramline resistance at the $1,700 region can hold, then the odds favour a challenge on the lower tramline target at the $1,640 level.

But I detected a shift away from a bearish sentiment last week to a more bullish stance – and the latest Commitment of Traders (COT) data supports this view.

Non-commercial Commercial Total Non-reportable positions
Long Short Spreads Long Short Long Short Long Short
195,795 43,898 46,176 153,048 348,998 395,019 439,072 66,350 22,297
2,840 -3,941 11,630 -2,962 7,875 11,508 15,564 2,088 -1,968
42.4 9.5 10.0 33.2 75.6 85.6 95.2 14.4 4.8
193 63 77 60 49 289 163

The week’s shifts are instructive! Basically, speculators have increased their longs/decreased their shorts, while the trade have done the reverse.

This, just before a rather large $40+ decline in the gold price. That’s called timing – bad timing. But par for the course. And for traders who do not run with the herd, a gift.

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading

Advanced tramline trading

An introduction to Elliott wave theory

Advanced trading with Elliott waves

Trading with Fibonacci levels

Trading with ‘momentum’

Putting it all together

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  • Hugh

    “We are seeing no signs of consumer inflation. What inflation does exist is confined to the financial markets and possibly US real estate (again)”

    I just unsubscibed from you.

    Over and out.

  • Simon

    Come on John, wake up!

    The gold market can’t be spread bet because the day-to-day gold price is being systematically manipulated by central banks. They’re massively debasing paper money across the globe in order to stoke inflation and reduce debts, and holding down the gold price as they don’t want the average punter to catch on. Sorry mate, but this is a mug’s game.

    Just buy physical gold. It’s money, everything else is credit.

  • Gold Bug

    John your call on the Dow has been wrong, wrong and wrong. Instead of reviewing where you went wrong and try to put right you are covering every other market and staying clear of the Dow. If only investing was that simple.

  • Frostya1

    John, Let`s ignore your worthless `Fibonaccics`, `Elliot Waves` & bleedin `Tramlines`, you & your Dooms-Day Mag. have exalted everyone to buy Gold & dump the FTSE,… WTF! ….Gold, Currencies, Gov-Bonds have fallen thru the Floor & the Footsie is so Stratospheric we`d need an astral telescope to view it.
    GET A LIFE & CHANGE YOUR JOB, You need a Counsellor, F.

  • notjessica

    No inflation!!!!!!!! Where do you get your petrol and food? Since 2007 its all up 30% to 50%.

  • Frostya1

    NotJess, As a living, breathing , paying, everyday person, You & Me are experiencing `Real Inflation` @ around 12-15% min. p.a.
    Forget the highly-massaged BoE & Treasury figs. we`re being taken to the cleaners by the Ministers of Improperganda.
    Heating fuel up by 35%, Road fuel by 40%, Food by 18%, Rail fares 13%, etc. etc. over 24 months, where the Hell do we equate all that to an average inflation of around 3-4% p.a. this side of Rampton or Broadmoor ???, F.

  • Frostya1

    John C. Burford giving advice on Investment is akin to Patrick Moore studying Micro-Biology without his Spectacles..F.

  • MutleyFool

    Sorry but I cannot reconcile a guy who has a PhD with the comment about “no consumer inflation”.
    The one reason I subscribed to Moneyweek was to escape the
    systematically manipulated inflation data downwards by central banks,Gov and the general media.We are sick of being lied to about inflation.It is very depressing coming from a source many of us trusted.
    It is insulting to our intelligence to be told this rubbish.
    I ,like millions of others,cannot afford to heat my small home anymore because of utility price inflation.
    We demand either an apology or a good explanation for this article.
    Seriously considering cancelling my subscription !

  • Robin

    Throw the bones, skin the cat, behead the chicken and peer into the depths of lizard entrails. Give me a break!

    This technical analysis has reached the point of technical absurdity. Funny how you guys are always going on about ‘precision’. Its like you have a complex about it.

    The reason this crap works at all is because of crowd behaviour. There would be statistical proof for your methods if you could clearly define what a PPP is. This crap isn’t getting us anywhere.

  • Frostya1

    John, I dont wish to seem unkind,….. but you must be the fittest prophet in the `City`. You`d have to be to get that far `up yourself` without the aid of a friggin safety – net, Frosty.

  • lucky bob

    You see no signs of consumer inflation?
    I suggest you go shopping.

  • Changing Man

    Don’t you risk drawing tramlines across the points that best suit your argument. I would draw them downwards from the highs and lows of January? Hopefully a “consolidation phase” and my money is hoping for a breakout upwards on the next upswing! (I followed the advice of Money Week’s “Resident Gold Expert” and bought into miners in a big way!) Ps if he is ” resident”, why does he keep “phoning in”? Maybe afraid to show his face in the office?

  • Frostya1

    I`ve booked you in for a `seminar for investment progression`
    advice chat at a small gathering down here, it will be fee-paying but mainly from your side. It`s known as a geriatric Care Home . I can assure you of a warm & friendly welcome from a lovely smiling audience who dont get too many visitors.
    Are you interested?
    If so, dont make too many plans to leave!..F.

  • Bronco Bill

    Seems like John you’re the only person in the land who believes that the CPI and RPI figures are correct.
    As for gold, my feelings are well known in past comments. Buy gold….oh! and dont forget silver.