The gold price hits my targets in the charts

There is much talk about the current and future surge in demand for physical gold from Russia and China in particular. The obvious conclusion is that the price should rise in the absence of a corresponding surge in supply. Many gold pundits offer copious data backing up their bullish views.

But here’s the thing: I have found over the years that there is little or no link between the supply and demand data and the gold price.

At first glance, that would seem to violate a fundamental law we learn in Economics 101. If basic supply and demand do not drive the gold price, then what does?

As long-time readers will know, I maintain that it is trader sentiment that drives market prices – and especially gold. A change in sentiment will produce a change in trend. Major highs and lows are always accompanied by extremes in sentiment. It’s really that simple.

Gold is the ultimate sentiment market. Shares offer dividends and the prospect of future profits. Commodities have an end use and values that conform more or less to the supply-demand balance (unless the markets are manipulated).

Bonds also offer yield in the form of coupon payments and respond to changes in interest rates in the economy.

But gold has few uses outside of the roughly 10% of total demand for the electronic, industrial and dental sectors. Around 90% of demand is for jewellery and investment – which are discretionary purchases and sales.

That is why I track sentiment data above all else.

How to set realistic profit-taking targets

In my last post of 2 June, I had a downside target for my short trade at the $1,240 area, which was hit. This was the chart then:

Gold price spread betting chart

My target was on or around the lower tramline. Remember, I trusted my upper tramline, because of the multiple accurate touch points with only minor pigtails. This was a vital clue that my lower tramline drawn off the early April low was to be a significant line of support, despite it having only one touch point, so far.

My admonition to watch the budding positive-momentum divergence was timely and served to convince me to take profits there for a tidy gain of around $40 on a trade that lasted a week.

But my longer-term scenario called for a rally off a low in this region. This is what I wrote: “But both groups of specs remain net long, and my guess is that before this down move ends, there will be a further swing by the specs to the bearish side.

“And that will provide the fuel for the massive rally that I expect.”

I noted that the specs had in the previous week added mightily to their short holdings, as revealed in the commitment of traders (COT) data.

The nervous gold market gives a solid buy signal

So how has the COT picture changed since then? Here is the data as of last Tuesday (sadly, it is over a week old):

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
(Contracts of 100 troy ounces) Open interest: 378,689
Commitments
159,567 98,440 26,148 156,553 219,703 342,268 344,291 36,421 34,398
Changes from 06/03/14 (Change in open interest: -3,452)
2,235 259 -2,258 -2,992 -3,286 -3,015 -5,285 -437 1,833
Percent of open in terest for each category of traders
42.1 26.0 6.9 41.3 58.0 90.4 90.9 9.6 9.1
Number of traders in each category (Total traders: 260)
111 80 66 51 49 190 170

 

Really, there has been little change as the market fell during that week. No useful information there.

But last week, the market did stage a rebound and gave a solid buy signal:

Gold price spread betting chart

There was a clear base forming along the lower tramline and I guessed that if the market could poke above the resistance of the pink zone, that would set the stage for a decent rally.

That placed me long in the $1,250 area with a protective stop just below the lows. Remember, a major factor going for me was the single-digit DSI (Daily Sentiment Index) bullish reading in late May.

And, as is typical with the nervous gold market, the market made another attempt at a new low, but the support held and it was off to the races towards my upper tramline. That event convinced me that the trend had reversed and the positive-momentum divergence was doing its work.

Why gold is a tricky market to trade

Here is the position as of this morning:

Gold price spread betting chart

This rally carried to the $1,285 area – a good $45 above the recent low. But it was getting perilously close to my upper tramline (in purple) and with a slight negative-momentum divergence there, it was time to take some profits off the table.

The decline off this high took the market to the Fibonacci 50% level (pink bar), which is a normal retracement before the rally resumes. But first, the market sprang another nasty surprise – it spiked down and then quickly reversed. Legitimate long trades taken in the pink zone could have been annoyingly stopped out on that spike.

And if you were quite rightly waiting for the market to go long at the Fibonacci 62% level (the most common retracement), you would have missed out. The market never quite made it.

This is what makes gold a very tricky market to trade!

Which way will the market go?

With this rally, can I find any valid tramlines to describe it?

Gold price spread betting chart

I certainly can! My upper tramline has a nice PPP (prior pivot point) and two accurate touch points, while my centre tramline has six accurate touch points, making it a very reliable line.

With these two tramlines, I can now draw a third lower tramline, and guess what? The nasty spike carried right to it before bouncing. Isn’t that pretty?

Yesterday, the bounce almost carried to the centre tramline in a traditional kiss and is peeling away as I write.

Now the market is trading in the channel between the centre and lowest tramlines and will remain there until it breaks free – but in which direction?

Meanwhile, I have taken good profits on the down move from late May and again on the recent rally. I will now let the market tell me what it wants to do as it traces out the next pattern. And I promise I will pay absolutely no heed to the reports of increased demand from Russia and China!

 

The outlook for gold in 2017

Gold began 2016 at £720 an ounce...

When Trump won the US Presidential election it hit £1078...

It’s now sitting just below the £1000 mark.

So should you enter the market now?

Our new report examines the forces likely to drive the price over the coming months...

Click here for your free copy

66% off newsstand price

12 issues (and much more) for just £12

That’s right. We’ll give you 12 issues of MoneyWeek magazine, complete access to our exclusive web articles, our latest wealth building reports and videos as well as our subscriber-only email… for just £12.

That’s just £1 per week for Britain’s best-selling financial magazine.

Click here to take advantage of our offer

Britain is leaving the European Union. Donald Trump is reducing America’s role in global markets. Both will have profound consequences for you as an investor.

MoneyWeek analyses the critical issues facing British investors on a weekly basis. And, unlike other publications, we provide you with the solutions to help you turn a situation to your financial advantage.

Take up our offer today, and we’ll send you three of our most important investment reports:

All three of these reports are yours when you take up our 12 issues for £12 offer today.

MoneyWeek has been advising private British investors on what to do with their money since 2000. Our calls over that period have enabled our readers to both make and save a great deal of money – hence our position as the UK’s most-trusted investment publication.

Click here to subscribe for just £12