Features

Are the gold bears on the right track?

In nature, you either adapt or get wiped out. John C Burford explains why it is no different when it comes to trading gold.

Charles Darwin, while writing The Origin of Species, proposed that of the untold number of living species that have been created on earth through the ages, only those that could adapt to changing environments survive and thrive.

Survival of the fittest' has become a clich.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The earth has been through huge upheavals in climate, continental drifts and composition of the atmosphere. But only those that could handle these immense changes stood a chance of not being wiped out.

And so it is in the highly competitive world of trading, where the environment can change overnight. Only those traders who have the mind to be flexible, adaptable and open-minded stand a chance of making serious money. Stubborn traders, unable to adapt, usually fail.

Advertisement
Advertisement - Article continues below

Today, I want to illustrate this principle by reference to the Swiss gold referendum result announced Monday morning.

Sell the rumour, buy the news'

Of one thing I am sure more and more of them will be forced to adapt (or die) if the rally gathers momentum, as I suspect it will.

Of course, the weak market on Friday and early Monday morning was the result of selling in anticipation and confirmation of the negative result of the Swiss referendum. As it happened, it wasn't even close and knee-jerk selling resulted immediately after the announcement.

But since bullish sentiment was at rock-bottom, the market had nowhere to go but up and up it went! Surely, this was counterintuitive (as market moves so often are). But another short squeeze was on, and that action confirmed that the $1,130 low made on 7 November was the end of two fifth waves, as I had suggested.

The Swiss no vote only served to bring more naive short sellers in. But those already short took that opportunity to take profits as they saw little more downside available. It was a classic sell the rumour, buy the news' event.

14-12-3-MWT-1

The dip to below $1,150 on Monday and subsequent rally has set up a new Elliott-wave pattern (more later).

Advertisement
Advertisement - Article continues below

Did gold make a bottom?

14 November

support

14-11-14-MWT-3

For my bullish picture to take shape, I needed the support to hold and the market to start a rally phase, thereby confirming my A-B-C (counter-trend) labels. This is what occurred:

14-12-3-MWT-3

Support did hold, I had my a-b-c and the rocket was lit. But it was not a case of off to the moon yet. There was the little matter of the Swiss referendum hovering over the market and that was to be held on 30 November.

The selling accelerated on Friday and early Monday, but note where it turned around right at my third tramline. Not only that, but this area was precisely coincident with my previous $1,150 support zone. Markets have memories!

The picture this morning

14-12-3-MWT-4

The Monday rally has five clear waves with a long and strong fifth wave (which also contains five sub-waves). The fifth wave is longer than the third wave, but that is OK it doesn't break Elliott's rules.

Advertisement
Advertisement - Article continues below

Yesterday, the market fell back to the Fibonacci 38% level to relieve the temporary overbought condition and is this morning staging a rally.

If you missed the Monday surge, another entry point was on the break of the small trendline shown.

The bears are on the run

If correct, the market is in the early stages of a large third wave up. To confirm this, I need to see a rapid rise towards my upper tramline and beyond to the last major high at the $1,250 area.

If the market falls back, that will not necessarily alter my Elliott wave scenario the second wave will be lower that on the above chart.

But for now, the bears are on the run and we'll see how many can adapt. Those that do will add to the bullish consensus and as the market rises, the bull/bear imbalance will gradually even out until at the top, where there will be another lop-sided imbalance. That is how markets work.

Finally, I was bearish gold in October at the $1,250 area and took profits much lower in early November. Today I am bullish. Am I fickle? Am I disloyal? Can I make my mind up?

Advertisement

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600641/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020