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Gold Technicals Portend Impending Breakout

Commodities / Gold and Silver 2012 Aug 10, 2012 - 10:14 AM GMT

By: Pete_Grant

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleSimilar chart patterns in seven major currencies signal potential for resumption of secular bull market

Ah, the long, lazy, hazy days of summer: Here in Colorado, it's been a particularly hot and dry one, leading to one of the worst wildfire seasons in recent memory. As for 'lazy', that's a pretty apt description of the gold market, which has been confined to a range of just $66.36 since the summer solstice.


Now, summer doldrums are actually quite common in the gold market. And as we like to remind our clients each year; historically speaking, the doldrums more often than not are an ideal time to buy gold, with about 2/3rds of average annual gains in the market over the past ten-years coming after the month of July.

Perhaps these doldrums just seem more...well, dull...because the market has been locked in a broader nearly $400 range going back to September of last year, when you may recall the market established its all-time high at $1920.50 and then promptly fell to a corrective low at $1534.06. The latter was modestly exceeded ahead of year-end with the 1522.40 low, but for all of this year, we've been relegated to an ever-narrowing range.

It's worth noting that last year's price action was the exception rather than the norm; with gold rallying strongly throughout the summer months, before succumbing to corrective/consolidative pressures into year-end. Yet, this year appears to be setting up for a possible reversion to more "normal" seasonal influences.

As a market technician by trade for many years, when I see a protracted series of lower highs and higher lows, I think I start to salivate a little. Triangle patterns — sometimes also called coils — are a classic (and reliable) continuation pattern; as are the closely related wedge and flag patterns. We've made note of such patterns on a number of occasions over the years, and several are highlighted in this post from 2009.

Continuation patterns tend to break-out in the direction of the underlying trend as the apex of the formation is approached, and as Mike Kosares pointed out in a recent article, gold pretty clearly remains in a long-term secular bull market.

I actually quite like the term 'coil' as it accurately describes how the market compresses and builds energy like a coiling spring. Frequently when that energy is released, the resulting moves can be quite dramatic to say the least, which is why it is generally a good idea to get on-board during the coiling process, rather than to wait for confirmation of the breakout.

The following daily chart shows the nearly year-long consolidation pattern in the yellow metal. However, the broader perspective provided by the subsequent weekly chart, clearly displays the attributes of a continuation pattern.

Gold - US Dollar Daily

Charts provided by NetDania

Gold - US Dollar Weekly

While gold in dollar terms is the most significant chart to be paying attention to, it's worth noting that similar patterns are evident in gold against all the major currencies. The prettiest symmetrical triangles are seen on the euro and Swiss franc charts:

Gold - Euro Weekly

Gold - Swiss Franc Weekly

A really nice decending wedge against the British pound:

Gold - British Pound weekly

Here are the charts for gold in the rest of the major currencies:

Gold - Japanese Yen Weekly

Gold - Canadian Dollar Weekly

Gold Australian Dollar Weekly

Charts provided by NetDania

From a technical perspective, it appears that gold is poised to appreciate against fiat currencies in general. Perhaps more aptly put: Fiat currencies appear poised to devalue further against gold. I trust that comes as no surprise to even the casual observer of this market.

With these types of continuation patterns, objectives are derived by measuring the base of the triangle and projecting from the point of the breakout. So for example, the base against the dollar is $398.10. Even if measured from the current level, that would suggest potential beyond $2,000. Use your fingers as a caliper and get a sense where the yellow metal might be headed in terms of the other currencies.

We here at USAGOLD are not alone in calling for a likely upside breakout from the recent range:

    • UBS precious metals strategist Edel Tully raised the bank's 1-month gold forecast to $1,700 early in August, which would surely constitute the anticipated breakout.
    • HSBC recently reiterated their bullish outlook, calling for $1,900 by year-end.
    • John Hathaway of Tocqueville Gold Fund stated in an interview two-weeks ago that he "wouldn't be surprised" to see gold over $2,000 by year-end.
    • Simon White, head of risk management for Hinde Capital also just wrote a piece entitled Gold Poised for Upside Breakout of Current Range.
    • The Erste Group's Ronald Stoferle maintained his bullish outlook in the recently released and widely respected In Gold We Trust report, noting that the "best season for gold begins in August."
    While the end of summer and the cooler temperatures of fall suddenly seem not so distant, the gold market may be poised to really heat up. Prudent investors would be well advised to take advantage of the remaining days of quiet consolidation, rather than be relegated to chasing the market when the breakout occurs.

In the buying mood? Check out our August Buyers Group, launched in conjunction with this article.

Peter Grant spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. The financial press frequently reported his personal market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver based investment management firm.

Michael J. Kosares is the founder of USAGOLD-Centennial Precious Metals and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold."

This special report is distributed with the understanding that it has been prepared for informational purposes only and the Publisher or Author is not engaged in rendering legal, accounting, financial or other professional services. The information in this newsletter is not intended to create, and receipt of it does not constitute a lawyer-client relationship, accountant-client relationship, or any other type of relation-ship. If legal or financial advice or other expert assistance is required, the services of a competent professional person should be sought. The Author disclaims all warranties and any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.

Editorial questions and comments: editor@usagold.com

E-mail alert. Never miss another issue.

Pete Grant, Senior Metals Analyst, Account Executive
USAGOLD - Centennial Precious Metals, Denver

For more information on the role gold can play in your portfolio, please see The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold by Michael J. Kosares.

Pete Grant is the Senior Metals Analyst and an Account Executive with USAGOLD - Centennial Precious Metals. He has spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. In 1988 Mr. Grant joined MMS International as a foreign exchange market analyst. MMS was acquired by Standard & Poor's a short time later. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. As a manager of the award-winning Currency Market Insight product, he was responsible for the daily real-time forecasting of the world's major and emerging currency pairs, along with gold and precious metals, to a global institutional audience. Pete was consistently recognized for providing invaluable services to his clients in the areas of custom trading strategies and risk assessment. The financial press frequently reported his expert market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver based investment management firm.

Disclaimer: Opinions expressed in commentary e do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.


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