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Well, that’s the question that the
central planners need to answer, but not one seems ready to admit the fact
that the US economy is slowing down further despite the rosy outlook of presidential
re-election cast of characters, which includes most of the media. Those
stubborn facts remain: unemployment is climbing, not declining; consumer
sales are down;
corporate capital expenditure (CAPEX) is
down; energy prices are headed up; food prices are headed up; real wages are
down; housing prices are still down; real interest rates are negative;
national debt is growing; and GDP is slowing.
So what’s the bad news? The bad
news is we are hurdling toward the fiscal cliff, Thelma and Louise-style,
with POTUS and Big Ben Bernanke holding hands in their blue ‘66
Thunderbird convertible as it plummets to the canyon floor below. The sad
fact is there is a leadership vacuum in Washington, which prevents rational
bipartisan decision-making regarding deficit reduction and spending
priorities. If the debt limit fiasco of last August is any measure of
dysfunction by the Federal government, then stand by for the real fireworks
display as the Super Committee cuts kick in, the Bush tax cuts expire (for
every taxpayer), and the Obamatax takes hold.
Each one of these Federal bipartisan
compromise measures will decimate jobs and grind growth to a standstill. A
recent study concludes that the automatic spending cuts mandated in the
Budget Control Act of 2011 affecting defense and non-defense discretionary
spending in just the first year of implementation will reduce the
nation’s GDP by $215 billion; decrease personal earnings of the
workforce by $109.4 billion and cost the U.S. economy 2.14 million jobs.
That’s no way to stimulate the
economy, which is exactly what Fed Chairman Bernanke told House and Senate
Finance Committees last week. The Chairman’s remarks painted a pretty
gloomy picture for US economic growth, and he repeatedly pointed to fiscal
policy (outside his control) as a major culprit. The markets were hoping he
would announce the start of QE3, but Big Ben could only reiterate that the
“Fed stands ready to act…when conditions require…” Oh
well, Ben and boys will have another chance to make the big announcement when
the FOMC meets again Jul 29-Aug 1. Chances are the Wisemen
will offer nothing earthshaking after their regular pow-wow.
The markets are searching for a reason
to climb, but the threat of extended recession in the US, deepening recession
in Europe and a slowdown in China all work against any sustained move.
Sideways motion seems to be the trend. Something has to change before
investors decide to pour capital into risk-on asset classes. Many are happy
to stay in Treasurys and precious metals until
there is some light ahead, which is why stocks have taken such a beating this
year, and prices of T-Bonds and gold are maintaining their prices.
What are the technical indicators
telling us about gold now? We can use technical pattern analysis and the more
complete Ichimoku Kinko Hyo
indicators to examine trading decisions for gold.
Gold has formed a symmetric triangle
pattern evident on the daily basis chart. Symmetric triangle patterns
typically form during a trend as a continuation pattern. The pattern contains
at least two lower highs and two higher lows. When these points are
connected, the lines converge as they are extended and the symmetrical
triangle takes shape. The pattern shape appears as a contracting wedge, wide
at the beginning and narrowing over time.
 
Symmetrical triangles can mark important
trend reversals. They can also mark a continuation of the current trend.
Whether signaling a continuation or a reversal, the direction of the next
major move can only be determined after a valid breakout. A
“breakout” of the pattern occurs when the closing price is above
or below the narrowing pattern lines. Therefore, the breakout can be to the
upside or the downside. Determining a valid breakout can be challenging;
price action can return to the breakout point creating a false breakout.
Increased trading volume concurrent to the breakout is a reliable
confirmation indicator. Other useful confirming indicators include proof of a
3% move above the pattern line and the time-based rule, such as a sustained
move over three days.
To determine the price target for a
breakout from a symmetric triangle pattern, we can either measure the widest
distance of the symmetrical triangle pattern and apply it to the breakout
point, or we can draw a trend line parallel to the pattern's trend line that
slopes (up or down) in the direction of the break. The extension of this line
will mark a potential breakout price target.
Today, price action is between the
pattern lines whose breakout values are 1612 on the upside and 1559 on the
downside. If price action slides sideways from here, the breakout values
converge, creating more opportunity for a breakout without a substantial
change in price. For example, if we project sideways movement to August 16th,
then the breakout values narrow to 1598 and 1571. The depth of the triangle
sets the price increment at 72 points.
The Ichimoku
Kinko Hyo indicators confirm these support and
resistance values of the symmetric triangle pattern above. The cloud or moku is the shaded area on the Ichimoku
indicators chart below. The cloud depicts support and resistance levels and
can be projected forward. For gold, the projected cloud is narrowing. Also,
the projected cloud top is flat, which portend sideways movement. The support
and resistance levels for the projected cloud out at August 17th are 1598 and
1590.
The Ichimoku
indicators tell us more about price gold than the triangle pattern. Ichimoku, the “one look equilibrium chart”,
gives us not only support and resistance, but trends, momentum, and trend
reversals in a single, coherent view of its five price-related indicators.
Professional traders use Ichimoku indicators to
trade currencies, futures, stocks and bonds successfully by tapping into to
strong trends. There are well established rules for trading using Ichimoku Kinko Hyo, which we
use at The Gold Speculator. Right now these indicators signal
“hold” for those that own gold. These same indicators will tell
us when the time is right to “Buy” or “Sell” to take
full advantage of the new intermediate trend for gold.
So no matter how bad the economy gets,
we can stay ahead of the pack by trading hard assets, such as gold.
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.
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