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Ah, the long,
lazy, hazy days of summer: Here in Colorado, it's been a particularly hot and
dry one, leading to one of the worst wildfire seasons in recent memory. As
for 'lazy', that's a pretty apt description of the gold market, which has
been confined to a range of just $66.36 since the summer solstice.
Now, summer
doldrums are actually quite common in the gold market. And as we like to
remind our clients each year; historically speaking, the doldrums more often
than not are an ideal time to buy gold, with about 2/3rds of average annual
gains in the market over the past ten-years coming after the month of July.
Perhaps these
doldrums just seem more...well, dull...because the market has been locked in
a broader nearly $400 range going back to September of last year, when you
may recall the market established its all-time high at $1920.50 and then
promptly fell to a corrective low at $1534.06. The latter was modestly
exceeded ahead of year-end with the 1522.40 low, but for all of this year,
we've been relegated to an ever-narrowing range.
It's worth
noting that last year's price action was the exception rather than the norm;
with gold rallying strongly throughout the summer months, before succumbing
to corrective/consolidative pressures into year-end. Yet, this year appears
to be setting up for a possible reversion to more "normal" seasonal
influences.
As a market
technician by trade for many years, when I see a protracted series of lower
highs and higher lows, I think I start to salivate a little. Triangle patterns
— sometimes also called coils — are a classic (and reliable)
continuation pattern; as are the closely related wedge
and flag patterns. We've made note of such patterns on a number of occasions
over the years, and several are highlighted in this post from 2009.
Continuation
patterns tend to break-out in the direction of the underlying trend as the
apex of the formation is approached, and as Mike Kosares
pointed out in a recent article, gold pretty clearly remains in a
long-term secular bull market.
I actually
quite like the term 'coil' as it accurately describes how the market
compresses and builds energy like a coiling spring. Frequently when that
energy is released, the resulting moves can be quite dramatic to say the
least, which is why it is generally a good idea to get on-board during the
coiling process, rather than to wait for confirmation of the breakout.
The following
daily chart shows the nearly year-long consolidation pattern in the yellow
metal. However, the broader perspective provided by the subsequent weekly
chart, clearly displays the attributes of a continuation pattern.
Gold - US Dollar Daily
 
Gold - US Dollar Weekly
While gold in
dollar terms is the most significant chart to be paying attention to, it's
worth noting that similar patterns are evident in gold against all the major
currencies. The prettiest symmetrical triangles are seen on the euro and
Swiss franc charts:
Gold - Euro Weekly
Gold - Swiss Franc Weekly
A really nice
decending wedge against the British pound:
Gold - British Pound weekly
Here are the
charts for gold in the rest of the major currencies:
Gold - Japanese Yen Weekly
Gold - Canadian Dollar Weekly
Gold Australian Dollar Weekly
Charts
provided by NetDania
From a
technical perspective, it appears that gold is poised to appreciate against
fiat currencies in general. Perhaps more aptly put: Fiat currencies appear
poised to devalue further against gold. I trust that comes as no surprise to
even the casual observer of this market.
With these
types of continuation patterns, objectives are derived by measuring the base
of the triangle and projecting from the point of the breakout. So for
example, the base against the dollar is $398.10. Even if measured from the
current level, that would suggest potential beyond $2,000. Use your fingers
as a caliper and get a sense where the yellow metal might be headed in terms
of the other currencies.
We here at
USAGOLD are not alone in calling for a likely upside breakout from the recent
range:
o UBS precious metals strategist Edel Tully raised the bank's 1-month gold forecast to
$1,700 early in August, which would surely constitute the anticipated
breakout.
o
o HSBC recently reiterated their bullish
outlook, calling for $1,900 by year-end.
o
o John Hathaway of Tocqueville Gold Fund
stated in an interview two-weeks ago that he "wouldn't be
surprised" to see gold over $2,000 by year-end.
o
o Simon White, head of risk management for
Hinde Capital also just wrote a piece entitled Gold
Poised for Upside Breakout of Current Range.
o
o The Erste
Group's Ronald Stoferle maintained his bullish
outlook in the recently released and widely respected In Gold We Trust
report, noting that the "best season for gold begins in August."
While the end
of summer and the cooler temperatures of fall suddenly seem not so distant,
the gold market may be poised to really heat up. Prudent investors would be
well advised to take advantage of the remaining days of quiet consolidation,
rather than be relegated to chasing the market when the breakout occurs.
In the buying
mood? Check out our August Buyers Group, launched in conjunction with this
article.
Peter Grant spent the majority of
his career as a global markets analyst. He began trading IMM currency futures
at the Chicago Mercantile Exchange in the mid-1980's. Pete spent twelve years
with S&P - MMS, where he became the Senior Managing FX Strategist. The
financial press frequently reported his personal market insights, risk
evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP
of Operations and Chief Metals Trader for a Denver based investment
management firm.
Michael J. Kosares
is the founder of USAGOLD-Centennial Precious Metals and the author of
"The ABCs of Gold Investing - How To Protect and Build Your Wealth With
Gold."
This special
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information in this newsletter is not intended to create, and receipt of it
does not constitute a lawyer-client relationship, accountant-client
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