The current technical position of the gold futures market makes it ripe for a sell off. Despite this we have seen some outlandish claims in the media recently from those ‘in the know’. They are not ‘in the know’ at all, they are just long gold or make money when it goes higher. In a recent interview on a major TV channel business program, a player predicted gold could reach $5,000 an ounce and that there was no need to think bubble!
When I hear these claims, the contrarian trader in me starts to think the opposite. We need to see gold hit $2,000 an ounce before we worry about three, four or even five thousand dollar levels. Gold has been a mover as a flight to safety or risk aversion but as things calm down commodity markets can fall just as quickly as they rose. In historical terms, the recent runs on gold are well and truly extreme and while the market could reach the far away levels some are predicting, this seems unlikely in the foreseeable future.
A chart on Gold provides some compelling information. I use a variety of charts, both mainstream and alternative. The one I want to share here is called a ‘swing chart’. It employs a mechanical model to determine trend and analyses the momentum behind a trend to measure its strength. Newer traders sometimes fail to grasp that the strength or weakness in a move will eventually become overdone, triggering a reversal.
Chart 1 – Gold Futures Weekly Swing Chart
click to enlarge
The pattern on this chart shows a weekly uptrend with higher bottoms and tops. At first glance you might think this indicates higher prices but this becomes less certain when we look at the magnitude of the moves. The previous upswing was more than $400 per ounce but when we study the average of the last 50 weekly up swings, the average is around $101 per ounce. This means the recent sprint higher was four times the average. Can we expect this to repeat? Possibly, but unlikely. It’s these moves that suck-in the novice with hopes of untold riches.
The daily pattern actually shows a sideways pattern forming. This generally leads to one of two outcomes – distribution or accumulation.
Chart 2 – Gold Futures Daily Bar Chart
click to enlarge
The reality of which outcome it becomes is always best made with hindsight, but the only way I could see this become an accumulation base is huge fundamental shifts in global economies, currency and debt management.
Which outcome we get is as yet unknown but the only way I could see this becoming an accumulation base is with huge fundamental shifts in global economies, currency and debt management.
We have seen a massive upswing that could correct just as quickly, but if you are in the bull camp you should be aware that a pullback may be needed to fuel the next upswing. At these historically high levels, the risk is being in Gold and trying to guess its direction. A safer strategy is to wait for confirmation and trade the direction using breakout trade strategies.