Gold is offering a potential triangle break out. Conventional market wisdom is for higher gold prices, whether as a result of central bank stimulus or a break out of inflation. At the more extreme end of the “gold bug” spectrum are theories predicting the end of fiat currencies (paper money) and the resurgence of gold as the global store of value. Unfortunately for the bugs, the triangle break out is pointing down, not up.
Another major problem for gold bugs is the gap between the cessation of central bank stimulus and any potential inflationary effects. While the BoJ seems set to continue pumping funds into 2014, US Fed board members are talking an end to QE3 as early as july, the Swiss Franc is now well away from SDNB intervention levels and the ECB is giving no indication of any future LTRO. In other words, global stimulus is dwindling, and in my view markets will start pricing withdrawal sometime in Q2 or Q3 this year.
Globally, inflation remains well contained. Should it start to head higher, the likely response from central banks will be further tightening (assuming economic recovery is coming through – a pre-requisite for withdrawal). And there could be a significant period of time between these two effects.
Barring further global crises, the near to medium term fundamental outlook is IMO poor. Now, have a look at the chart:
Source: CMC Tracker
While past performance is not necessarily a guide to the future, the chart shows the power of triangle break outs for gold over the last year. There’s a clearly defined entry at the break of the triangle, and a clearly defined stop above the top of the triangle at $1,616.63. That’s why I’m looking at the following stop entry trade: