Gold's Amazing Run to $1,900
In August 2011, gold broke out to new highs of over $1,900 per ounce. What a ride from November 2008 when gold rose from above $700 to August 2011 with gold at $1,900. Gold remained in an unbroken channel moving ever higher, until near the end of its run, it burst out with a fresh jolt of energy and broke out above its channel to exhaust itself by reaching its high above $1,900.
Since August 2011 for a full year, gold meandered downward, essentially staying within the band of $1,500 to $1,650. As it fell, the lows got lower and the highs of each re-bounce got lower. Whether the news was positive or negative, whether currency was being printed in greater or lesser amounts, gold remained within this downward channel.
Now Gold Appears to be Breaking Out
If you charted the path of gold, its price stayed very strictly within the lower and upper band lines of this gradual weakening. That is, until the end of August 2012, almost one full year after gold started meandering downward. The chart of gold suddenly is showing very strong bullish signals.
Firstly, in mid August 2012, gold broke through the top line of the channel in which it has been imprisoned for a year, and it moved almost $150 within two weeks in a very strong upward path. That is considered a breakout. It remains pointed upward on the charts.
Secondly, if you draw a line of support under the price of gold since November 2008, you can see that in the past 4 years, gold never breaks below that support line until May 2012, when it penetrated to the downside. It dropped $100 in a week - quite dramatic. Then, it stayed there for a while, and then in August 2012, broke boldly to the upside. This movement is called the Ernmor trap, named after my friend E Hobbs. A false movement below a support line in a triangle formation, followed by a strong movement upward, breaking through old barriers, is a very strong bullish signal.
It is called a 'trap', because the cautious interpret the breakdown as a sign of weakness, whereas the experienced look for that dramatic upward turn. It is almost as if the security has exhaled deeply, giving up its position, in order to breath deeply and gain strength for the dramatic push upward. Gold's movement over the last two weeks is a classic trap formation. If it continues, it is a very bullish sign for gold.
Thirdly, if you examine the path of gold since it started its dramatic rise around September 2002, you will notice that twice before, patterns occurred that are remarkably similar to the pattern that we are now witnessing, and each time they foretold of a dramatic up-rise in the price of gold coming quickly. Starting in March 2004 and ending in May 2004, the identical pattern of a jolt upward, then a pause and a gradual drift downward, was followed by a strong upward trend. In March 2008 until December 2008, it happened again. The 2008 pattern was eerily similar to the current pattern, and following that pattern, the price of gold continued it relentless and dramatic move upward.
The Catalyst for Gold's Upward Movement
It seems that Ben Bernanke's words this week triggered this breakout. Traders now believe that the Fed Chairman will initiate a new round of Quantitative Easing (QE), the euphemism for printing more money to inject liquidity into the system. Gold bugs believe that the more money that is printed, the more valuable gold will become. These days, the government does not actually print paper money. They just create more bonds that they buy from themselves and voila, there is more money electronically floating around.
The Specific Comment
Ben Bernanke's word change from "could" to "will" is significant. The statement now reads: "The Fed 'will' provide additional accommodation as needed" instead of "The Fed 'could' provide additional accommodation as needed." The implication is that QE3 is ready if needed.
A Word of Caution
Mr. Market is in the business of inflicting pain. What appears obvious as to what will happen, is never a surety. Betting the bank on a sure thing, is a perfect formula for allowing Mr. Market to inflict great pain on you. Caution and moderation is the key to long term success. Preserving capital is always more important than a quick score.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. Larry Cyna and/or the CymorFund may have positions in the shares of companies mentioned.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.