Gold Chart of The Week

Each Week will be providing us a chart of the week as analyzed by a member of their team. We hope that you enjoy and learn from this new feature.

Weekly Gold Report (February 18th through February 22nd)

Last week definitely had a “hurry up and wait” sort of feel to it. With China on a week-long break for the Lunar New Year Holiday, there was potential for light volume action across the board. And despite the fact that it has been a long time since a G20 Summit has caused any waves, traders were holding their breath and waiting on news that might have a significant impact on Currencies. The market sprinkled in a few reports in the US and in Europe, but nothing really stuck for a directional move.

The only noteworthy movement that caught my attention was the continued pressure of Gold and Silver. While both Metals were clipped throughout most of the week, Gold Futures took the brunt of the selling, and even put in new lows for this year. Front month Silver held the January lows for support, but Gold prices barely took the prior lows into consideration before targeting $1600 on light volume pressure. Some will say it was because Chinese investors were not in the markets to provide a supporting bid, other will say that is was due to continued interest in climbing US equities, and some may point to a two week rebound in the US Dollar or even bring up “seasonality” stats and scrape the bottom of the barrel with a quote from George Soros from 2011…………….at the end of the day, it is impossible to pin one or two fundamental stories to the movement in Gold. The price of Gold is probing for a technical bottom, and when it finds it, the market will correct.

Not too long ago, (think back to the first and second QE days) money was being made hand over fist on the long side of the Metals. It seemed like every television and radio commercial break was littered with “Cash for Gold and Silver” commercials urging everyone to race out and melt down those crappy earrings or that ridiculous necklace that you haven’t worn since the 80’s. And who could forget the interviews on television of traders calling for Gold to hit $5000 and Silver to target $150 before a pause? I often wonder where those money managers are now. Regardless, those ideas and those predictions (AND the commercials) all began to slow last year in March when the US FED pulled back on their easing programs for a few months. Slowly but surely, the Metals found their way lower and eventually into a typical Summer range before pricing in the FED’s return for “QE Infinity”. Once the news broke that the FED was officially back at the printing press, the Metals provided a classic “buy the rumor-sell the fact” trade and have not been able to produce a reliable story since then.

Trading Metals like Silver and Gold can be a double edged sword. Both can perform well when there is strength and confidence in world markets, and can also perform well when things are shaky. This is what makes trading Metals from a fundamental perspective very difficult. For example, when world markets are flush and investor confidence is high, theoretical demand for Precious Metals like Gold and Silver would be high. Jewelers will purchase physical Gold and Silver in anticipation of demand for their products, and because of the Industrial Component that Silver carries, producers will also look to do some anticipatory buying as well. Conversely, when global markets are shaky and confidence is low, both Silver and Gold have the ability to perform well as  “flight-to-safety” vehicles as well. Traders and investors will move money from risky investments into these Metals. It is thanks to this duality that Gold has been such a steady investment over the last ten years or more. But it also can be the reason for some of the worst headaches known to man.

Aside from the enormous margin requirement hikes a few years ago in the Metals, I think a big turning point or tell in the story for Gold Bugs and Silver Bulls was the lack of follow through buying when QE was officially announced for the third time. I admit, I thought being long was the place to be when the news broke as well. Who wouldn’t? But since the October 2012 highs in Silver and Gold, I am yet to find a reliable story to explain direction in either market. There was one interesting read on the relationship between the price of Apple shares and Gold which was a good read after the fact, but other than that there is only the normal day to day banter that is helpful one day and garbage the next.

My advice to those looking for ideas on Silver and Gold is to put down the articles and pick up a chart. That is step one. Step two is to make a commitment to be either a trader or an investor in these two markets. I think it has to be one or the other, because in this market you can’t be both.

In order to be an investor, you can purchase physical Gold and Silver and hold on for the long haul, or you can open an account with a decent sum of money, get involved at a favorable price and ride things out. Use the daily or weekly chart to pick a spot that you are comfortable with to initiate an order and stick it out. This is what an investor will do.

A trader will use the same charts to initiate an order, then identify the amount of risk that they wish to attach to the trade by using STOP orders or hedging with options, and finally will adjust positions as price action allows. He or she needs to refrain from reading articles and newsletters written by billionaires and investors with enormous amounts of capital at their fingertips. It creates a classic case of “champagne taste on a beer budget” ideas and will frustrate the trader to no end. The trader should instead be using the past performance of the metal, as seen on the charts, as their guide when developing their strategy. The price action that a trader can read on any chart tells a much better story than the one they will read in the next days news.

The daily charts connected to this letter are of the front month Silver and Gold Futures. After the Summer ramp in anticipation of the latest round of QE, both of these markets has been in what I consider a traders market. It most definitely has not been a comfortable trade for anyone that was either long or short the futures for longer than a few days or weeks. In short, investors have had a hard time maintaining confidence in a directional play in Silver and Gold, while traders are using sound technical analysis to make money on both sides. Until further notice, I think it is best to stay away from the big fundamental story, and be a trader instead of an investor.

Thank you for your interest,
Brian Booth
Senior Market Strategist

** There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data contained in this article was obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Information provided in this article is not to be deemed as an offer or solicitation with respect to the sale or purchase of any securities or commodities. Any decision to purchase or sell as a result of the opinions expressed in this article will be the full responsibility of the person authorizing such transaction.

2 thoughts on “Gold Chart of The Week

  1. It wasn't long ago this site was predicting the start of big bull market in gold. It would be pushing through $1800, heading for $2000 and possibly $2500. No-one with any sense should be short on gold. You're right in that traders would do well to ignore all predictions from the experts, concentrate on the charts and make their own judgements.

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