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Thursday, July 8, 2010

Gold Chart Pattern: more correction on the cards?

Last month, I had used the 'Bank Customer Services Representative's Behavioural Index' to surmise that the gold chart pattern was near a market top. Commodities and precious metals investors or traders need not be unduly concerned about this particular index, because it is a figment of my imagination.

The young lady at my bank branch - who usually tries to sell me the bank's Mutual Fund and insurance products - tried to sell me gold coins and even a gold 'biscuit' last month. Her unsuccessful sales pitch concluded with the plea: Every one is buying!

When every one is buying, I like to sell. But I don't have any investments in the yellow metal or in gold ETFs. So the next best thing was to caution investors from buying near what was obviously a market top.

In last month's analysis, I had observed a symmetrical triangle consolidation pattern in the gold chart, from which I expected an upward break out. A look at the 1 year gold chart pattern will show that the upward break out was followed by a new 52 week high:


Gold's price used the 14 day MA as a ramp as it rose to touch a high of 1261. The bears pounced almost immediately. The price dropped to the 14 day MA and after a brief bounce, fell sharply to the 1200 mark.

After another brief bounce up, gold's price has slipped below the 1200 level. At the time of writing this post, the price of the yellow metal is near the 1190 level. There is support at the 1160 level and then at the 200 day MA at 1120.

Note that the price has not dropped to the 200 day MA in more than a year. It is quite possible that the chart will bounce up towards the falling 14 day MA, as it doesn't appear to enjoy staying below the short-term moving average for any length of time.

There are still a lot of gold bulls out there - including well-known investors like Jim Rogers. There is no reason to doubt that the bull market in the gold chart pattern is robust and healthy, and will remain so as long as the 200 day MA is rising below the price chart.

The correction from the recent top is less than 6%, and a further drop to the 1160 mark may provide an opportunity to enter. I still have the feeling that much of the recent spurt in prices has been due to panic buying by investors who are worried about a further deterioration in the global economy.

The growth in the global economy has been tepid at best, but it is a growth and not a contraction. As production and consumption slowly limp back to normal in the European and US economies, much of the panic buying in gold may get unwound.

It may not happen tomorrow, or in the near future, but it may be a sharp unwinding when it does happen. As in any good investment strategy, stick to your asset allocation plan - where gold's percentage allocation should be in the 5-10% range.


Dilip Raju Lillaney said...

Interesting analysis. I think Gold is a buy at current levels. I usually invest in equities but I am a bit cautious for the time being as the Nifty has not been able to make new highs for a quarter now. FII's seem to be uncertain and MF's are selling. Only a few equities like BPCL are hitting new 52 wk highs but even that seems unsustainable for long depending purely on the fundamentals.

Dilip Lillaney

Subhankar said...

Thanks for your comments, Dilip.

Gold is in a long-term bull market and should be a buy on dips. But for the bull market to sustain, there should be 10-15% corrections from time to time.

The FIIs have been net buyers recently. It won't be a surprise if we see a new Nifty high soon.

dancilhoney said...

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