Diary of a Financier

From the Trading Desk: Long Gold (GLD)

In Trading Desk on Wed 28 Mar 2012 at 01:04

I bought the Gold ETF (GLD) into the close this afternoon, per my StockTwits reconciliation:

  • $GLD bull inverted H&S about to launch higher. Neckline resistance ~$174. $GC_F
    Mar. 27 @ 2:49pm

I wanted to post the charts because Gold has traded in neat accordance to technicals for some time, so it’s good for me to get my thoughts down now…

~~~~

Starting with the long, monthly fractal, I notice multiple Bump & Runs higher have left Gold (GC/) trading on a frightfully steep pitch for longs. (I wouldn’t want to be John Paulson or Kyle Bass, who move such a large position that they’d never be able to unwind their exposure to Gold.) GC is completely unhinged from its moving averages–reminiscent of a momentum name like GMCR, OPEN, LULU, or AAPL. I applied Bollinger Bands at ±2 standard deviations on the monthly chart to provide some context. The chart looks a bit ambiguous. On one hand, indicators are working on a bullish reversal, and the pricetrend is back within its upper sigma band. On the other hand, the weak determinism of parabolic charts makes me mistrust even the intermediate-term:

GC monthly- while really stretched above its SMAs, it’s returned to the channel within its 2 sigma bollinger band.

Then, I turn to the weekly chart, where I see the most recent Bump & Run clearly illustrated. Gold traded along a bull trendline support for almost three years (since 2009) then shot skyward (July 2011) only to return back to its original trendline. Since that 2011 high, Gold has traded into the vertex of a symmetrical triangle that I’d argue is a bull pennant. The next move–invariably a breakout or breakdown–is crucial. While indicators don’t suggest anything too optimistic, I defer to the classical patterns (bull pennant here) in trending markets like Gold:

GC weekly- after a classic Bump & Run breakout rally, Gold returned to support; now in a symmetrical triangle.

Clearly, the longer-term fractals offer little definitive insight as to the direction of Gold. The daily chart, however, has a tip–so evident that I don’t feel inclined to appeal to the weekly & monthly fractals. This is what turned me on to my GLD long position: a classic, inverted Head & Shoulders has materialized. Were it to complete the pattern, target resistance lay at $174 in GLD (~$1783 GC/). I would characterize such a move as a bull breakout above the aforementioned symmetrical triangle–something with the potential to tow longer-term fractals toward a bull reversal. I haven’t heard anyone mention the development, which general ignorance reinforces my conviction:

GC daily- bullish indicaters echoed by inverted Head & Shoulders with $1783 neckline resistance (GLD $174).

Much like I did in January, I plan to hold GLD for merely a trade, diligently hopping out when the H&S completes its pattern at that $174 target–even if it means leaving a few points on the table. At my target, the risk variable in Gold’s equation ratchets up significantly, because some fundamental factor must force GLD higher. Central Bank policy is the likely candidate, and as of today, I’m nary confident in proximate intervention…

~~~~

Ben Bernanke’s comments yesterday communicate his intention to front-run any economic potholes with preemptive action. Given the public dissent of his fellow FOMC voting peers (and Congress), I consider Mr. Bernanke’s comments an effort to persuade confidence.

He knows he cannot accomplish ‘preemptive action’ with any expedience, especially on the heels of the TARP hard-sell to Congress. Yes, a panicky, hapless parliament will approve any emergency measure (read TARP, TALF, EFSF, LTRO) to avoid delivering a stillborn to its constituents. However, Mr. Bernanke says he’ll implement policy before the emergency materializes. He says he’ll have a prescription written upon early detection. Unfortunately, Congress doesn’t move unless threatened by imminent crisis (read Y2K, housing crisis, debt ceiling). To be sure, Mr. Bernanke doesn’t need Congress’ approval–the Fed operates on an independent charter. I don’t think he cares about reappointment either–he’s motivated by being right, vindicating a career-worth of Keynesian study. Even still, the bureaucratic friction matters, for two reasons:

  1. The Fed Governor needs the support of his twelve FOMC voting members to enact open market operations.
  2. FOMC members have almost all asserted that the White House/Congress/Treasury must couple fiscal intervention with en force monetary easing to affect structural defects in the economy; Mr. Bernanke himself stated as much in a testimony on Capitol Hill.

That’s my read on the political policy that might resonate to Gold. Simply put: US markets will not actually realize reflation in the near-term, but investors want to believe in it, particularly into managers’ quarter-end window-dressing. Their “want” can help markets levitate (GLD to $174) in the short-term. Thereafter, my intermediate expectations hold, especially after considering how impracticable a nimble stimulus will be.

–Romeo

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