Are we seeing a paradigm shift in gold?

gold futures chart
February gold futures – daily chart

For gold bugs, 2013 was certainly a year to forget with the precious metal continuing its remorseless journey lower, a journey punctuated with minor rallies which promised much, but delivered little. To say it was a gloomy end to the year would an understatement.

Roll the year forward into 2014, and things are looking up a little, but for longer term gold bugs, the question is always the same. Is this simply another false dawn, or is our beloved metal going to gain some traction and finally reverse the bearish trend? This is indeed a tough question to answer with any degree of certainty and really hinges on the personality of gold, its underlying characteristics if you like, and whether these have fundamentally changed as the current economic malaise continues to grind into another year. If perhaps we start with the technical picture, and then consider the fundamentals in more detail to try to answer the question.

From a technical perspective, it has been an interesting start to the year, to say the least. The first significant candle was the long legged doji of the 31st December, suggesting a possible pause point in the move lower. This was duly validated early in the new year with gold futures rising strongly from the sub $1200 per ounce level, to test the $1240 per ounce region on Friday. Monday’s price action was volatile to say the least, moving between $1212 to the downside and $1247 on the upside, before finally closing the session with another long legged doji at $1228 per ounce.

The start to the year has been bookmarked between these two doji candles on the daily chart, both of which are sending clear signals of indecision at this level, with today’s price action once again validating the most recent candle, as gold moves lower again to trade at $1228.30 at the time of writing. The worrying sign for gold bugs, is that in both yesterday’s and today’s trading session, the high of each session was capped by the deep resistance now in place in the $1240 to $1260 per ounce region and clearly defined by the volume at price indicator on the left of the chart, with further resistance ahead in the $1310 to $1340 per ounce area.

Moving to the associated volumes for the last few days, these have been mixed to say the least, and reflect the lack of activity following the extended holiday period, with trading volumes only slowing returning to normal levels.

gold futures monthly
February gold futures – monthly chart

Whilst the daily chart may be inconclusive at present, the monthly chart gives a more balanced longer term view, and from the associated volume here, there is still no evidence of a buying climax by the big operators in preparation for any longer term reversal. The floor of ‘short term’ support is clearly visible on this chart, just below the $1200 per ounce level, and should this be breached, there is little potential support below until we reach the $1100 per ounce region, a price point gold bulls will be hoping is not seen this year. Finally, and perhaps most worryingly, the demise of gold, has not been reflected in the US dollar, with this once reliable relationship having apparently broken down once again. Whilst gold was falling sharply, the US dollar was trading in narrow range for most of the year, between 78 and 85, with price action best described as lethargic.

Moving to the fundamental picture, the problem for gold is that it has few primary drivers at present. Inflation is not on the horizon, and unlikely to be for some time to come. Safe haven status appears to have drifted away as investors have becomes inured to the bad news over the last few years, and in the context of 2007 and 2008, any bad news is simply relative. Safe haven currencies seem to be preferred at present, and with only China propping up demand for the metal at present, the short term outlook remains gloomy. Gold then perhaps is changing its character and moving to one more akin to some traditional commodities, where supply and demand become the key drivers in a journey of price discovery.

Perhaps this is where gold is heading in the short term, where price discovery becomes the real driver and the economics of mining and markets become the focus. Gold will no doubt return to its pre-eminent state, but for the time being, it is in a transitional phase, driven by the unique economics of the last few years. The good times will return, but in the interim gold traders will need to rethink some of their old ideas, and align with the new characteristics of the precious metal.

By Anna Coulling

About Anna 1064 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

2 Comments on Are we seeing a paradigm shift in gold?

  1. In Dec 2007 I retired and decided to sell off the Mutual Funds that my Financial Adviser had sold me and I stayed in cash in a tax-sheltered account during 2008! During 2008 I studied regularly, and did classroom and On-line Courses on Trading. In 2009 I began to Swing Trade Stocks cautiously, using my own “Rules”. I hold half the Stocks as my “Core Holdings” and I have been making 10-20% annually. Last autumn I decided to read how to short Stocks and do Options with Covered Calls, before enrolling in a course. While browsing through the Amazon catalogue I cam across your excellent book on VPA and I am just finishing it and I will write a review for Amazon. Do you do “hands on courses” on “Trading”? How often are they held and what does each cost? Please email me, thank you. Kind regards, Provash

    • Hi Provash – many thanks for your kind comments and I’m delighted that you enjoyed reading the volume price analysis book and have found it useful. With regard to hands on courses, I am not running any at present, but will be doing these later in the year. These will purely focus on the volume price analysis approach to trading, explaining all the principles and techniques using live charts and examples. I will also be publishing a follow up book with worked examples along with a CD set of live examples, both of which will be available on Amazon later in the year. So one way and another, lots more to come on VPA!! Once again many thanks and do keep in touch – all best wishes -Anna

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