Gold Triangle Break

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:

Gold, Daily

20130327 gold

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:

20130327 gold tkt

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
This entry was posted in Gold, Market, Trading and tagged , , , . Bookmark the permalink.

10 Responses to Gold Triangle Break

  1. @JackieTheTrader says:

    Triangles can be tricky. I prefer my triangle over the one shown here. Patience is key with triangles …

  2. According to my read of the last triangle on the chart, it hasn’t yet broken down. Are you pre-empting the break?

  3. Gary Hutchinson says:

    Hello Michael, Why do you anticipate the break to be to the downside when the previous triangle break May / Aug was to the upside and both triangles appear to be simular and in a downward trend. Thanks Gary

    • Hi Gary – I’m guided by the price action – gold is sitting on the bottom edge of the triangle right now. While traders used to read a direction into various triangle shapes, studies show they divide roughly 50/50 between reversal and continuation patterns. Of course, if it doesn’t break on the downside my stop entry sale will not trigger. Cautious traders may place two stop entry orders – a buy and a sell – and if an order is triggered, cancel the other.

  4. James says:

    The trend is down, resistance from June, July & August.

  5. Gary Hutchinson says:

    Thanks Michael.

  6. Mark – thks. I am very involved in the gold market – bullion, EFT and listed/unlisted companies. Some comments maybe of interest.
    1. Gold is looking “very tired” – Cyprus and EU issues did almost nothing. US appears to be on a sustainable growth path (question mark over withdrawal of stimulus – just let bond maturities roll off and stop buying!!).
    2. ETF liquidation by the smart investors (Soros and Bacon).
    3. Appaling performance of mining stocks in general and especially gold (poor management, lower quality ore grades, different sovereign risks, completely understated per ounce production costs, bloated life styles, massive capex (quite a bit leveraged), zero hedging policy assuming a much higher gold price, complete ignorance of FX impact and nonsensical returns to shareholders). Some of these problems will be hard to get rid of.

    SELL

    • Thanks Graham – good to get an expert view

      • The “sell” button can as you know turn rapidly into the opposite. I cannot remember if Red was sell and green was buy. The only immediate upside for gold is for something horrible to happen out there in the big wide world – there appear to be a few fuses that could be lit!! Otherwise equity markets must at some point top out (compression of dividend performance), perhaps a bit of lame inflation here and there etc + of course the all important Australian GE coming up – I am sure the world is really bothered about that!!

        As a trade might have a look at buy Ag sell Au on the basis of the perceived improving economic situation in general – a snapshot at the history of this “pair” is of interest:

        Timeline Ratio
        Roman Empire circa 200 AD 12:1
        1792 15:1
        1940 97:1
        1970 22:1
        1980 (Bunker Hunt accumulation 73-80) 37:1
        1990 (Warren Buffet buying 1993) 94:1
        2009 66:1
        2012 (reserves global 540k tonnes) 57:1

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