Gold's going sideways under a bull flag, ready for a run or fall
The gold market fell out of bed in the early days of the global financial crisis, bottoming at $US700 an ounce in October 2008. Then the precious metal went into an up trend that lasted right into 2012 as this week's chart, produced by Alan Clement, a member of the Australian Technical Analysts Association, demonstrates.
That rise perhaps was driven by the desire of investors for a safe harbour as the rest of economic life went through its earthquakes during that period. In one spike in mid-2011 it reached $US1875, actually breaking through the top of the upward trend line it had been following.
It quickly re-entered the trend band. But with increased price volatility, gold finally broke out of the up trend in April 2012, the point marked with a red circle on the chart. Since the trend breakdown, gold has been consolidating in a sideways pattern that moves slightly lower with each swing. This formation is known as a "bull flag".
Despite the lower swings in this chart, a bull flag is actually seen as a positive set-up. Technical analysts read it as showing that while some investors might be selling to lock in profits after the breakdown in the up trend; there are fresh buyers willing to enter the market and support it at higher levels, meaning it doesn't retrace the up trend.
The period since the trend breakdown is essentially a correction, Clement says.
A correction can come in two ways: as a temporary price fall or "through time, where the market absorbs its gains by moving sideways at the new elevated levels. Gold is clearly in the latter category," he says.
Clement observes that in a bull flag situation "once the distribution from the sellers to buyers has taken place, the buyers will typically then move the market to fresh highs".
Gold is again testing support at the lower bull flag trend line at $US1560. If this level holds, Clement expects the market to make a move back to its resistance level at $US1770. "And with commodities across the board looking bullish, there's every chance we could see a breakout from the bull flag pattern and a move to new highs if and when it reaches that resistance level," he says.
On the downside there is a clear make or break point in the support line at $US1560.
If gold spends more than a couple of weeks below that level, Clement says, that would be a sign that the market wants to move lower from there.
Investors can get exposure to gold through futures, options, exchange-traded funds or contracts for difference and buying the metal itself. A rise in price should push up the prices of gold producers, especially if they have not hedged output prices.