Bottom or Continuation Formation?

After the original drop in gold price from the top of $1,920 per ounce in 2011 to $1,180 per ounce in 2013, gold has started a sideways consolidation triangle pattern. Is this a correction, or is it just a pause within a move that will retrace the whole move since 2009? What does sentiment tell us?

The gold market is a very opaque one and very hard to analyze. The amount of gold exchanging hands outside the markets is enormous. China seems to continue buying in a very discrete way and shows regularly, through speeches but also actions, that it considers gold at the core of its currency war, mainly with the United States. It is interesting that recently, on every attack on the gold price to push it down, once the original move stops, almost every time momentum fails to take gold lower. This pattern doesn’t look like a correction in a bear market to me, but more like a bottoming formation.

 

1-spot-goldChart 1: Triangle in spot gold – click to enlarge.

 Sentiment Extremes

If we look at the sentiment in the gold mining stocks we can observe that the price of gold mining stocks measured in hard money (gold) has hit a 71-year low (chart #2). Today, you can’t even mention gold stocks to portfolio managers or investors, even less tell them to buy. The only thing missing is those ready to predict that gold is valueless and its price will go to zero, as some predicted when gold hit $250 in the ‘90s. A recent Reuters article was even indicating a possible end to India’s historical love affair with gold.

 

2-barron-gold-mining-index-bgmi-gold Chart 2: the ratio of the BGMI to gold has recently reached its lowest point since early 1942 – click to enlarge.

 

If we look at the gold sentiment composite index (chart #3) as calculated by Nick Laird, we can also see it has hit the low reached in 2009, and is bottoming out. The index is compiled from data sets of precious metals, gold indexes, gold stocks and gold mutual funds and these data sets have been collated from four primary gold producing regions: America, Australia, Canada and South Africa.

 

 3-gold-sentiment-index-spot-goldChart 3: Spot gold, the composite gold sentiment indicator and the ratio between the sentiment index and spot gold – click to enlarge.

 

Price Momentum

I also like to look at price acceleration (chart #4) and especially compare it with the acceleration during the last currency crisis that ended in the collapse of the Bretton Woods gold exchange standard. As you can see, price acceleration hit a low close to the 35-year low recently and reversed, even moving into positive territory. This comparison with the 1970s is important for me because I strongly believe we will have an international monetary reset and gold will be part of the new system.

 

4-spot-gold-year-year-percentage-changeChart 4: year-on-year percentage changes in the gold price (note the huge momentum of the two major up-legs in the 70s; nothing comparable has occurred in the gold market since the 1999/2000 lows)

 

With tensions rising in the world and the beginning of a new Cold War, I suspect this triangle pattern is more of a bottoming formation than just a correction within a bear market. The new Cold War is pushing the world more and more, if not into a military World war, at least into a trade war. We are already into a currency and gold war. We already see it with the trade and travel restrictions imposed on Russia and the counter actions taken. I expect the sanctions against Russia to fail just as the US sanctions against Cuba have failed, but they will have a major impact on the world economy.

In a recent article in the Financial Times, John Dizard mentioned that gold’s “popularity as a medium of exchange for international transactions has been soaring, particularly in the past few months, as the impact of US government sanctions on non-compliant banks has become severe.” And that is despite gold being “the most expensive and least convenient of all of the monetary alternatives to the dollar.” I am surprised this article has not attracted as much attention as I think it deserves. Smart money worldwide is already taking action, just as sovereigns like Russia and China are, by slowly, but also very discreetly, accumulating gold.

Gold sentiment is not just negative, it is extremely negative, while all the bears in US stocks and the dollar have capitulated. However, the breakout from this triangle formation has to be watched very closely. Any move below US$1,200 and, more specifically, $1,180, to which I give a low probability, would require a reassessment. I have to caution you that a false breakout from a triangle formation to the downside followed by a reversal is still possible as well, as happened in 2012 (see chart #1) at the top.

 

This article has originally been posted at Goldbroker.

 

 

Charts by Nick Laird

 

 

 

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