Diary of a Financier

Gold evolves into a precarious bull pennant

In Capital Markets on Tue 26 Feb 2013 at 11:39

Until yesterday, I had been weaning myself off the Gold (GC/) train. My interest has been piqued again, because GC has reached a new fork in the road, and its chart has evolved.

We still own a 1% allocation to GLD, which I trimmed down from 2% on 2/15, when it broke down below a 38.2% Fibonacci support ($1635). That move confirmed the failure of gold’s Cup & Handle, which I’d been tracking since 3q12. Last week, GC also broke below a short term bear channel, but subsequently held the critical trendline support (~$1560) of its primary symmetrical wedge:

GC daily

GC daily

That support substantiated a previously immature pattern, a larger bull pennant, which has stoke my confidence and become my primary focus. As you can see, this bull pennant is a long term construction, which should rally up over $2000 if successful:

GC weekly

GC weekly- bull pennant

As always, there is a risk of failure. Anecdotally, I worry about the reversal of real interest rates, which will likely ascend into positive territory this year (given my 2.40% intermediate target on the 10y). In a regular Congressional testimony, Ben Bernanke spoke today about the Fed’s tools to tighten monetary policy. I worry about the bottoming and reversal in the SPX/Gold ratio, which I do think put in its secular bottom at the end of 2012. Finally, I worry that gold is hated. Across the board, gold has fallen in value against every major currency. See XAUUSD, XAUEUR, XAUAUD, and XAUCHF, all down since 10/2012. Even XAUJPY has fallen significantly since the beginning of February–an outsized reaction to the pause the Yen has taken at the end of a massive devaluation (USDJPY +19% since 9/2012).

If GC fails to hold this trendline support, it will become a long term sell, as it should immediately slide to support of its consolidation channel ~$1530, which would be part of a robust, larger descending triangle.

In the coming weeks, successful confirmation of the bull pennant would lead me to accumulate more GLD–but not much more than a 2% allocation. I’m considering additional precious metals exposure via Iamgold (IMG-T), a beat-down Canadian miner that showed up on a core value quant screen a ran last week. IMG is oversold on all fractals, but I’m exercising patience in waiting for a confirmation of reversal, such as bull divergence. It’s entirely possible that gold is hated right now–so hated that it’s oversold, but after decades of outperformance, I have my eye on that descending triangle, which would trigger a bear market.

–Romeo

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