Gold Is The Only Sound Money
By Tyler Durden
Submitted by Alasdair Macleod via GoldMoney.com,
This article notes that the technical situation for the gold price has sharply improved, to the evident surprise of many mainstream analysts. It discusses possible reasons behind the turnaround, and implications for the future.
Technicals
The technical situation is shown in the chart below.
A “golden cross”, with the 55 day moving average crossing above the 200 day moving average with both of them on a rising trend, and the share price above both these moving averages, has now occurred. This is generally taken by traders to indicate the bear trend has reversed, and a bull market is now in place.
More interestingly, this change of direction is combined with a bullish pennant pattern, which commenced on 11th February and completed on 3rd March, taking precisely three weeks. This is shown by the dotted lines. The intraday price movements (not shown) conform exactly to the pattern, and the break-out on 4th March saw high volume with an increase to a record amount of outstanding Comex contracts.
The other technical qualifications for a pennant are also fully satisfied. It follows a sharp rise, is a consolidation lasting no more than three or at most four weeks, volume diminished while the pattern played out (taking Comex volumes as proxy), and the break-out was a resumption of the trend. It therefore appears to be a text-book example.
Pennants give us a price objective, which equates to the preceding rise from its breakout point. This yields a minimum price target of approximately $1400, which with pennants can happen quite quickly. And that helps explain, from a purely technical point of view, the seemingly unstoppable strength in the gold price.
Technical analysis is the justification for investors to consider and take action in capital markets, without having to understand the underlying reasons why prices change. Indeed, in these days of seemingly infinite quantities of bank credit being applied to financial speculation, price trends are being driven day-to-day by charts, making prices dependent on the application of credit rather than fundamental appraisals of prospective values.
Technical analysis is notoriously fallible, encouraging action independent from rational thought. We are told that flows into gold ETFs have been positive for the last forty days. But if we ask the question, whether or not the buyers of physical gold represented by paper entitlements are doing so for financial protection, or alternatively are energised by the hope of rising prices, one must conclude that it is most probably the latter.
Put another way, technical analysis is justified on the basis that by encouraging the madness of crowds, it works, and there is plenty of loose money slopping around the markets to ensure it might. This really is not good enough. A reasoned understanding of what gold actually is, an appreciation of vested interests, and an analysis of the practical consequences of investment flows, is vital for us as individuals if we are not to be whipsawed in volatile markets.
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Source: Gold Is The Only Sound Money
