Wednesday, October 24, 2012

Triple Top in Gold?

By Scott Silva


Gold is amazing stuff. Gold has launched wars, destroyed and created whole societies. For thousands of years gold has been the trusted medium of exchange, and for hundreds of years had been the reserve currency of developed nations. Today, there is revived interest in gold. Central banks are net buyers of gold bullion, and more and more individuals are buying gold and silver bullion. That’s because gold has intrinsic value as money anywhere on the globe. Gold maintains its value as fiat currency is debased as central banks print Trillions more paper notes on the pretext of stimulating ailing economies. In fact, these robber-baron governments are implementing their secret agenda to monetize massive national debts, that is, paying interest (rarely principle) with paper currency of ever-diminishing value. Where are the RICO laws for that criminal practice?

Gold has been good for investors to own. Owning gold is an excellent way to diversify almost any portfolio. Hedge funds, banks, and other institutional investors have been buying gold, particularly in the last few years. The price of gold shows the bulls have been in control for years, pushing the price of gold up four-fold over the past ten years.

Some analysts see a triple top pattern in the weekly charts for gold. The triple top pattern typically marks a reversal. Since gold has been in a strong bullish trend for years now, a trend reversal would be strong and steep. The commodity bull cemetery is full of gravestones bearing the inscription, “killed by a triple top”. Are the charts telling us the price of gold is headed for a lethal fall?  Has gold formed the bearish triple top that some analysts see? Or are there other technical signs that we can see from the charts that can help us decide to buy, sell or hold gold right now?

Well, we know from technical analysis that a triple top chart pattern is indeed a bearish pattern that typically marks a reversal. We can spot the pattern by its three successive peaks near major resistance, formed over time by successive moves up from the same support level. The three tops should be spaced roughly equally apart. Trading volume should show a declining trend over the three-peak formation period. The weekly basis chart for spot gold displays such features.

So should we sell gold now before its inevitable fall?  Well, it might be more prudent to
determine if the bearish triple top pattern displays a break below its support level. At present, weekly price action is 200 points higher than the support level of 1527, so we would need to see a major decline from today’s price. If the price of gold does decline and drops below 1527, the measured move for this pattern shows gold could drop down to 1251. Ouch!

There is another pattern in the weekly gold chart worth considering. It is a large, long term bullish ascending triangle pattern that began to form way back in February. The ascending triangle pattern is a continuation pattern, which at breakout, can result in a powerful move up. We identified a smaller ascending triangle pattern in gold for readers of these pages (“Charting Gold, 8-14-12), which predicted the breakout from 1635 to 1724. The measured move calculated in the larger, longer term ascending triangle pattern if the gold price were to break above 1803 is 221 points, which would bring the bullish breakout target price to $2024/oz for spot gold. 

Will gold break above 1803 on its way to 2024? We shall see. Price action is finding support at current levels, and 1803 is just 4% away from last week’s closing price of 1730.40.

The ascending triangle pattern is in the weekly basis chart for gold. There is yet another bullish pattern evident in the weekly chart, namely, the bullish cup and handle pattern. This is a powerful, long term formation that dates back to February. The bullish cup and handle pattern traces out the “cup” by the gradual price decline, then bottoming out, and then gradually returning to the “lip” of the cup. We can see this feature in the chart from February to September for spot gold. We can also discern the formation of the “handle” feature, which is the sideways to slightly declining price action. The measured move for the bullish cup and handle pattern is calculated by adding the value of the depth of the cup portion to the breakout level, which is the upper trend line of the handle feature. The measured move for spot gold in this pattern is 274, which would bring the price target to $2077/oz were gold to close above the 1803 on the weekly chart, the breakout level at the “lip”. 

There is good potential for a more upward pressure on the gold price. The Fed meets again this week. Chairman Bernanke could announce he is expanding the scope of his monthly bond-buying program (QE Infinity) in response to yet more disappointing US economic data. More QE will likely push gold higher. Gold could also receive a boost from progress across the pond. If the EU gets closer to a solution to Spain and Italy’s debt troubles, the Euro would gain against the Dollar, which would send gold priced in Dollars higher. Also, renewed violence or the threat of violence in the Middle East or Africa would be reflected in higher gold prices. Finally, the US election outcome will impact the price of gold. A pro-growth president would put pressure on gold prices, as was the case under President Reagan. If the incumbent survives the election process, gold is likely to stay high in price, consistent with ultra-easy monetary policy and massive deficit spending.

So, we will be watching which way goeth gold in the short term, up 4% or down 11%, before the next big moves predicted by the charts take place. At present we do not expect gold to plummet from a bearish triple top pattern. The fundamentals support high gold prices for the foreseeable future. However, we shall stay vigilant as we tip toe past the triple top cemetery.

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.

The question for you to consider is how are you going to protect yourself from the vagaries of the fiat money and economic uncertainty?  We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio has outperformed the DJIA and the S&P 500 by more than 3:1 over the last several years. Follow @TheGoldSpec   Subscribe at our web site  with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

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