Gold is at a crossroads – which way will it turn?

We are all aware that gold has been in a long-term bull market. The reasons are spelled out ad nauseam in the blogosphere, in the mainstream media, and here at MoneyWeek. 

Following the credit crunch and the QE money-printing operations, faith in fiat currencies has hit a very low ebb.

And it has been amplified by the very low short-term deposit interest rates available to investors.

Seeking safety of capital following the stock market rout of 2008/2009, many investors have turned to gold as the one and only time-tested store of value.

The last time I covered gold, I showed the one-sided nature of the market with reference to the commitments of traders report, which breaks down the gold futures holdings of the various market participants. 

Here is the latest data as of June 14 (available at www.cftc.gov):

Long Short
Hedge funds 247,000 56,000
Smaller trader 64,000 18,000
Speculator totals 311,000 74,000
(Commercials) (171,000) (409,000)

The market is still one-sided with the speculators holding over four long bets to each short bet.

Interestingly, the silver data shows a pretty even split! And silver was heavily promoted as being as good as gold (until the flame-out at $50).

Gold is today trading only $35 below the all-time high made on May 1st at $1577, while all other major markets are down substantially from their highs (with silver down around 30%).

Crude oil and copper are also down substantially off their highs.

So, is gold a special case? 

Gold is still in a bull market, but it may not last

Let’s have a look at the charts.  Here is the daily going back a year:

Gold spread betting chart

(Click on the chart for a larger version)

I have drawn three tramlines.

T1 lies right across the major lows since the January low.

T2 clips many important highs and lows of 2011.

T3 passes across the all-time high.

Just gazing at this chart shows we are still in a major bull market, there is no doubt. The one event that would change this verdict for me is for the market to break T1, which lies around $20 below the current price (as of Tuesday 21st June).

But as I write, the market is challenging the excellent downtrend line drawn off the all-time high.

This is a significant line of resistance. I have expanded the area inside the purple box below:

Gold spread betting chart

(Click on the chart for a larger version)

This area is a very large triangle, which is a well-known pattern to chartists. Usually, when prices move out of a well-formed triangle, they often move sharply.

The market bounced off this downtrend line yesterday (Monday) at $1,547, rallied to within $2 of it this morning (Tuesday), and is currently backing off.

The rally off the June 13 low at $1,510 can be counted an A-B-C pattern, which is counter-trend. This implies the market may top out soon.

But if it can overcome the downtrend resistance, it should carry a lot further.

This is the crossroads I mentioned and the market currently has two choices, as I see it:

1 It can punch up through the downtrend line and move towards T2 (currently in the $1,580 area);

2 Or it can move back down to support at T1 in the $1,525 – $1,530 area, where it would either break this support, or move back up.

As a trader with no position, I am happy to sit back and observe the market make up its mind.

If we are looking for an upside breakout, a sensible trade would be to place buy-stops to enter just above the downtrend line.

Any breakout is liable to be sharp, but your entry needs to be protected by a sensible stop loss, just in case.

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