Charting Gold

“Some men see things as they are and say why – I dream of things that never were and say why not.”

If George Bernard Shaw were around today, he might apply his famous quote to the price of gold. Spot gold is trading near it January levels, and down from its high for the year at 1792 back in February. As GBS might ask “What’s been holding the price of gold back?”

The simple answer is there are no more buyers than sellers. Owners of the yellow metal are not selling, and others are not buying right now. That has not been the case throughout the year, so far. The buyers swarmed in back in February to bid the price up to nearly $1800/oz. And there have been some intermediate dips and rallies over the past several months. But here has not been enough selling pressure anytime this year to push the price of gold down below 1571 (the opening price on January 3rd) for very long.

The monetarist point to the growth in the money supply as a major factor contributing to the high gold prices.  Since 2009, the Washington money printing Triumvirate (Fed, Treasury, Congress) have flooded the system with over $4 Trillion in new paper money. Although the Fed has not committed to another round of Quantitative Easing this year, it has continued to expand its balance sheet in subtle ways. For example, the Fed increased its liquidity swap lines with other central banks to $31.02 billion last week, compared with $27.23 billion the week prior. More importantly, the banks are spilling more money into the economy from their $1.7 Trillion ocean of excess reserves. Adding new money debases the currency in circulation, robbing purchasing power for anyone who buys with Federal Reserve Notes. Gold benefits from the weaker Dollar.

Stocks also benefit from the easy money regime. Just the hint of QE3 is enough to send stocks skyward. Chairman Ben continues to entice but has yet to succumb. But the rumor of added stimulus has buoyed the S&P 500 above 1400 for the first time since March.

Some technical analysts have identified several bullish breakouts in the gold charts. On July 31st, readers of these pages saw what resulted in a failed breakout of gold from a symmetrical triangle pattern at the 1612 level. We suspected the breakout might revert based on the lack of confirming volume, a tell-tale doji candlestick pattern and Ichimoku Kinko Hyo indicators that pointed to sideways price movement. We can see now that prediction proved correct. But what are the charts telling us about the price of gold today?

The failed symmetric triangle pattern for spot gold has now formed an ascending triangle pattern.

This is a bullish pattern that portends a move up on a valid breakout from the top trend line level, which in this case is 1635. Typically, the ascending triangle usually forms during an uptrend as a continuation pattern.  Although there are instances when an ascending triangle signals a reversal at the end of a downtrend, more often it forecasts a continuation of the established trend. All ascending triangles indicate bullish accumulation.

We can see that higher lows have established the ascending trend line at the bottom of the triangle. The apex extends beyond current price action. The target price from a valid breakout is calculated by projecting a line parallel to the ascending line, from the beginning of horizontal trend line, forming another right triangle. The target price is indicated along this target line at breakout. If a valid breakout had occurred on yesterday’s closing price, the target price from the pattern would be 1725 or so. The lower volume during the accumulation phase is a good indicator (highlighted by the heavy line).  A spike in trading volume at breakout helps to validate the bullish ascending triangle pattern.

Will gold breakout of this bullish chart pattern?  We shall see. The Ichimoku Kinko Hyo indicators confirm the continuation pattern with accumulation.

We can see on the daily chart above that all Ichimoku indicators are bullish for spot gold.

Price action is above the cloud, which is bullish and the projected cloud is bullish (shaded green).

The Tenkan Sen is in bullish position above the Kijun Sen. And the Chikou Span is above price action, which is a bullish sign from this momentum indicator.  These signals, while bullish overall, are showing signs of weakening bullish sentiment. For instance, the Tenkan Sen has flattened out and looks to be dipping slightly. Also, the Chikou Span is close to cloud and has tipped toward it the cloud. The separate MACD oscillator is narrowing, which shows a loss of momentum.

So will gold breakout out to the upside soon? The technical indicators are saying “Why not.”

Responsible citizens and prudent investors protect themselves and their wealth against the ambitions of over-reaching government authority and debasement of the currency by owning gold. Gold is honest money. Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

 

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