Much like the ripples in a pond commodity prices have calmed following their sudden, volatile sell off a couple of weeks ago, and whilst many are still wondering why, one of the principal reasons was the unexpected increase in margin requirements by the CME. Indeed this is often a precursor to a reaction lower and is the reason I closed out my own gold contracts at the same time. So the question is where are commodity prices heading now, and one of the most interesting charts at present is that for spot gold whose price is now consolidating into an extremely strong pennant formation on the daily chart and is a pattern we should all be watching closely, not least for implications for the price of gold but also for the US dollar.
From a technical perspective, the 40 day moving average provided the initial support to the sharp four day sell off and indeed continues to provide a key platform in any test to the downside. To the upside ,we have a series of lower highs with price action now consolidating around the $1495 per ounce where the point of the pennant is now focused. Regular followers of my gold analysis will know that this is always a precursor to a sharp and explosive price move away from the point of the pennant but the question, of course, is whether it is likely to be to the upside or the downside.
This is a really difficult call and ,as a confirmed gold bug, my instinct is to look for a breakout to the upside which actually breaks one of the cardinal rules of trading which is never fall in love with what you are trading as you will always see what you want to see and not what is actually there. So for any confirmation perhaps we should look at related markets such as the US dollar and the GLD ETF. The latter is particularly interesting because it was confirmed yesterday by the SEC that the Soros fund recently liquidated all their holdings in this ETF, a fund in which Soros had first invested back in 2009/2010. Ironically, his investment was just before his famous quote about gold being the “ultimate bubble”. The mystery now is what he has done with his profits? Perhaps he’s now bought the precious metal itself or is simply sitting on his enormous pile of cash!!
George Soros, notwithstanding the sell off in the GLD was accompanied with ultra high volume (as you would expect) but particularly on the last of the 4 days of the commodity crash, with 51.3m shares traded on the day followed by a subsequent bounce higher suggesting a period of accumulation during the day’s trading. Indeed subsequent down days have been characterised by narrow spreads and high volume all suggestive of further accumulation in preparation for a rally higher. Maybe this is the clue we need for any move in the spot gold price.
Of course, we also have the dollar gold relationship which continues to hold at present and with the dollar index appearing to have run out of steam in the 75.9 area this is beginning to look increasingly weak, although it must be said that both the 9 and 14 moving averages have now crossed the 40 day moving average indicating a degree of bullish momentum in the short term for the US dollar. So, an interesting conundrum all round.
Moving back to the spot gold chart if the break out does occur to the upside and breaches the $1515 area then we can expect to see gold move strongly higher, along with other commodities and break above the $1575 as a result, whilst any move to the downside may re-test support in the $1456 and then even pull back as far as $1445 where further support awaits. As a gold trader myself I am now standing aside and waiting for the breakout signal to arrive.