The Next Golden Move

By JMTG’s Head Trader James Mound

April 29^th, 2003

            Gold’s recent plunge from $390 highs has left market participants pondering the next major move in gold prices.  With recent trading indicating an indecisiveness among speculators and institutionals alike, it becomes more and more difficult to grasp the short term outlook for the market.  The technical and fundamental outlook over the long term is simplified when it is broken down. 

            Gold is priced in US dollars.  Do not minimize this critical point.  To a foreign investor, gold becomes less expensive as the dollar weakens (or as their particular currency gains strength against the dollar).  Therefore gold prices generally trade opposite, or inverted to, the US dollar.  This is not unlike the relationship between interest rates and real estate values.  A $250,000 home at a high interest rate would equate to a much more expensive home at a lower interest rate, mainly because the monthly payment would be similar.  Therefore real estate values tend to rise on lower interest rates, and decline at higher rates.  Similarly, gold prices will rise on a weaker dollar because of the reduced price to foreign investors.  This will create a greater foreign demand and boost gold prices.  Thus, it is a very big point of interest to gold speculators to analyze the next move in the US dollar. 

*The US dollar reversed a long term uptrend over a year and half ago.  Currencies, which a normally long term trending markets, are showing short term signs of bouncing.  This is more often then not an opportunity to jump on the longer term trend at better prices.

**The recent break in the near term flag pattern suggests a quick retest and ultimate break of critical double bottom support at 97.62.  This sure looks bearish to me.

***Weekly US Dollar chart courtesy of Gecko Software’s TracknTrade.

            Another major relationship to gold prices is the stock market.  As investors have put a premium in gold prices as a flight to quality move off of dissipating returns in the stock market, the next move in gold hinges greatly on the next move in the stock market.  Flight to quality can best be defined by investor concern over speculative investing, like the stock market, and often occurs when the stock market no longer becomes a safe place to make returns on investment.  Over the five major bear cycles in the stock market’s history, gold prices have been a consistent profit maker as a diversified investment.  Therefore, if the stock market is in a recovery phase, this premium already partially built into gold prices, will quickly dissipate and cause a decline in gold prices.  However, if the recent post-war bounce in stocks is short-lived, and another sell wave is about to commence, then additional flight to quality premium will be added back into gold prices and a rally should ensue.

*On this weekly chart, the Dow looks like a short term bullish market, but continues to be extremely bearish on the longer term outlook.

**The market not only hit a multiple top high at or near 8500, but broke through and then back below, which is ultimately a very bearish sign.

***Weekly Dow chart courtesy of Gecko Software’s TracknTrade.

            Looking at the recent gold congestion in gold prices, short term traders are perplexed by the market’s inability to continue down or rally.  This congestion is normally a sign of an impending breakout.  When and where becomes the question.  Looking over numerous time frames is normally the best way to decipher short term confusing trade signals and see a much clearer path.

*Only a daily chart, gold appears at a critical juncture.  Will the recent rally follow through and break critical $340 resistance?  Will the trend and arc formations hold to see another run up?  A move above $340 would be an incredible confirmation.

**Daily Gold chart courtesy of Gecko Software’s TracknTrade.

*On a weekly chart, gold prices appear to be holding to separate but similar trend line supports, with the most recent bounce coming just above a solid 50% retracement indicator, which is a solid tool in finding pivot points in breakout markets.

**Weekly Gold chart courtesy of Gecko Software’s TracknTrade.

*On the longer term monthly chart, gold is still holding a beautiful arc bottom, with longer term trend line support holding up (barely). 

**With recent move to $390, gold thoroughly broke through the 50% retracement mark from the 1995 highs, suggesting that the market may have another run up left in it.

***Monthly Gold chart courtesy of Gecko Software’s TracknTrade.

*Disclaimer: There is risk of loss in all commodities trading. Please consult a James Mound Trading Group Broker before you trade for the first time. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. James Mound Trading Group, or anyone associated with JMTG or moundreport.com, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (clients or otherwise). Past results are by no means indicative of potential future returns. Information provided is compiled by sources believed to be reliable. JMTG or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of James Mound Trading Group LLC. Total cost, or cost/credit of trade (as referred to in the trade above), includes the cost/credit of entry, commissions and fees. Typical commission is an approximate mean of commission rates amongst JMTG customers, but can be more or less depending upon the individual account/customer, services rendered, account size, trading volume, etc. Options do not necessarily move in lock step with the underlying futures movement. Commissions at JMTG range from $3 to $27.50 per side depending upon the market traded and specific commission rate charged to the client. Fees range from $2.88 to $7.50 per side depending upon the market traded.