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Gold traders await an early breakout

Gold traders await an early breakout

Alright. So what the heck is going on with this market?

That was the question thrown at me when I arrived at a dinner party on Friday night.

Of course, most people might get a hello when they walk into a room and see their friends.

But not me – or at least, not on that night.

I knew exactly what my mate was talking about. It wasn’t the Aussie market. Even though that fell almost 1% on Friday.

Nope. He was talking about gold and its complete lack of price action.

Uh, you aren’t going to like to hear what I have to say.

Price doesn’t match growing demand

Gold.

It’s one of the few assets where the underlying demand doesn’t reflect the physical price.

I explained this just two weeks ago in the Daily Reckoning Australia. Here, the price of gold we see daily is really a result of ‘price discovery’ coming from both the London Metals Bullion Association and the COMEX futures exchange.

You see, demand for the physical metal is up. But the price of gold has been falling since May.

In the three months prior to September this year, gold bar and coin investment rose 28% compared to the same period last year.

Same goes with central banks. They’ve bought 22% more in the September quarter than last year.

And yet, what’s gold done?

Tumbled and then moved sideways.

As far back as June, I had been suggesting the gold price fall was part of a 10% correction. More to the point, I said it was a crucial component of a particular stage of a gold bull market.

Well, the fall played out as I predicted.

However, once the price of gold ‘bottomed’, it did, well, nothing.

That’s amongst a tetchy political backdrop increasing naval tensions in the South China Sea and the Federal Reserve’s continuous rate hiking. Gold has hardly moved.

If anything, the price of gold has dipped further as the US dollar has gone up.

To put it simply, normally, this sort of backdrop would boost gold.

Yet, the yellow metal is having a miserable time.

Just how much longer will it last?

Mr Squiggle attacks the charts

Alright, confession time.

Last week, as I was getting a Hard Money Trader video together for subscribers, I became a little obsessive over the gold charts.

Scratch that. It was a caffeine-fuelled, three-day search for answers.

I was looking at 15-minute chart data, then hourly, then 4-hourly, and then daily. Frustrated at that, I’d went searching for micro-trends (a fool’s game, I tell you), and then looked into bigger trends.

I was drawing lines on those candle bars like Mr Squiggle. Although in those wee hours of the AM, Mr Squiggle probably could have done a better job.

Once the mess of lines didn’t make much sense, I switched to using momentum indicators.

Momentum indicators such as the Relative Strength Index or the Moving Average Convergence Divergence (MACD) are often useful to help move out noise and show you an overall direction of an asset.

You know what they showed me?

Nothing. Nada.

In fact, if anything, they confirmed what I had already suspected but didn’t want to admit.

The gold price is ‘range bound’.

Bow out to avoid going broke

You couldn’t ask for a worse chart pattern than a range bound one.

They are notoriously difficult to trade. And if you keep trying to chase the ‘swings’, you’ll go broke.

Right now, the gold price is stuck between US$1,210 and under US$1,230. That’s a very tight US$20 price range the yellow metal has been stuck in for the past two weeks.

Check it out.

Gold price US dollars 4 hourly/weekly chart

Source: Investing.com

For now, this range may last a little longer, too. There aren’t really any catalysts to drive the metal higher for now.

However, when gold does break out of this range, get ready for a spectacular rally or fall.

That’s right. While I don’t think the gold price is going to fall, the fact that the yellow metal has been stuck in this range means its next move is unpredictable.

And most gold traders would settle for something interesting to happen with the gold price.

Does that mean I’m no longer bullish on the gold price? Nope. I’m the ‘perma gold bull’. That’s not going to change anytime soon. Even with little short-term trading data to go on, the longer case for a gold bull market is intact.

But from a shorter trading point of view, these are rough conditions.

So, what’s a trader to do?

I’ll tell you what I suggested to my mate.

Bow out.

Don’t go broke looking for a ‘breakout’.

When the market gives you nothing to go on, sitting it out is often the smartest decision. Plus, you keep your capital dry. Meaning you’ve got it ready to go when the right opportunity presents itself.

Remember, sometimes not being in the market is the best trade you can make.

There will always be another chance.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia