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Within the last two weeks, the price of gold dropped sharply to levels
not seen since July 2012 and nearly as low as the lows of December 2011. Spot
gold lost 112 points in the ten days from February 11th to
February 21st, a 6.7% slide.
Just prior to the selloff, many analysts identified an onerous chart
pattern as well as a popular technical indicator that appeared to be turning
bearish enough to reverse golds long standing bullish trend. The
worrisome chart pattern is the bearish triple top. The indicator that anxious
traders carefully watched for proof of a trend reversal to the downside is
aptly named the Death Cross.
The price of gold did fall in those ten days. But, did the bearish chart pattern
predict a fall in the price of gold, or did traders act to create a decline?
A look at the market
conditions surrounding the sudden selloff in gold shows the bearish chart
pattern actually failed, and traders may have had more to do with the selloff
than many observers might think.
First lets examine the bearish triple top
pattern, also known as the triple top reversal pattern. We know the triple
top chart pattern can lead to some powerful downdrafts, especially if the
successive tops are separated greatly from support levels and the tops are
spread over a long period of time. The triple top pattern occurs when price
action meets resistance, falls, and retests resistance then falls, twice
again. The resistance level of gold recently is clearly established at 1805.
The support level is also clearly evident; it appears as the bottom of a
trading range. The support level is 1554. The three tops and the support
level are evident in the weekly chart for gold below. The depth of the
trading range between resistance and support in this pattern is 112 points. A
reversal occurs when price drops below support with relatively high volume.
But there are two elements
missing in the bearish triple top pattern that are required to validate the pattern.
First and most obvious is the fact that price action has not dropped below
the support level of 1527, although the drop came close. On February 19th,
gold traded as low as 1554.30 but closed at 1559.60, quite a bit higher than
the support level.Price action has yet to close below the support level of
the pattern.Second is a lack of confirming higher relative volume, which may
be moot without the breakout. Nevertheless, there is no sign of capitulation,
or massive selling pressure. The conclusion is the triple top reversal in
gold has not occurred.
But what did occur is a sudden
selloff. What caused it?
The answer, in my opinion, is
the power of the self-fulfilling prophesy. Traders believed that a selloff
was coming and so they sold. Selling begot more selling, which continued
until there were no sellers left, leaving the buyers in control. What did the
sellers see coming for gold? It was the terrifying Death Cross, the bearish signal sent when the 50
day moving average drops below the 200 day moving average. It is highlighted
by the circle on the chart below. Traders could see steady convergence in the
averages days before the selloff. Then, just before the cross, sellers sold
hoping to get ahead of the decline. And by selling, more sellers were alerted,
all driving the bid lower. The prophesy of a selloff became a selloff. It is
a reliable phenomenon. Traders with long positions set their stops at such
junctions. And the shorts kick in at these points as well, hoping the decline
will be deep. These sell long and buy short orders are made by humans and
machines. Nowadays its
difficult to tell which moves the market more.
The bullish trend for gold
remains intact. We can make this statement because technical support has not
been breached. In fact, the recent decline was healthy for gold. It has
allowed some profit taking, and new buyers to enter at bargain prices. The
major trend remains bullish for gold. Tuesday, Chairman Bernanke dispelled
any rumors of golds
demise, when he affirmed his commitment to continued Quantitative Easing,
until such time as US unemployment shrinks to 6.5%.The Chairman is referring
to the administrations
favorite measure for the out or work. The true unemployment rate, the U-6
measure, is so much higher that it is deemed politically incorrect (a lofty
14.6% for January). At that rate of job growth over the last four years, the
Fed will be buying bonds until 2035!
There is no doubt that more QE
is good for gold, and evidently, stocks. QE is better for gold because gold
cannot disappoint analysts and traders with lower quarterly earnings, which
is one trap the ultra-easy monetary policy springs for stock market
investors. Stock yields appear attractive compared to negative real interest
rate fixed income assets.
The Fed has distorted not only
the yield curve but also the risk/return balance. This has pushed investors
into stocks and in the stock indices higher. We are seeing companies manage
earnings well while missing top line revenue expectations.This is not a
sustainable growth model for equities.The model collapses as interest rates
rise, and margins are squeezed further. Lower sales revenues are a symptom of
recession in Europe, a slowdown in China and continued sluggishness in the
US.
QE Infinity is artificially
pumping up stock prices. The forward PE for the S&P 500 Index, for
example, is 17.90 compared to 15.78 a year ago. If there were true earnings
growth, which only can be sustained by true revenue growth, the forward PE
would be much higher.Then, there is the $ 2 Trillion cash trove sitting on
company balance sheets here and in overseas tax havens. Companies are not
investing in growth. They would rather buy back shares and sit on cash.
So, how have investors fared
in stocks vs gold during the time of QE? Since Chairman Ben and the Treasury
began their ultra-easy monetary regime in 2009, gold has gained dramatically
compared to the broad stock index (SPX).
No one can predict the future,
including Ben Bernanke. But he seems intent on continuing his dovish ways.
And as he does, those who own gold will be better off for it.
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
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Speculator investment newsletter, which is based on the principles of
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The question for you to
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fiat money and economic uncertainty?We publish The Gold Speculator to
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Portfolio has outperformed the DJIA and the S&P 500 by more than 3:1 over
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