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A nice time to be bullish on gold

One of the most intriguing assets that you can trade right now is gold.  It order to have a proper perspective on where the price of gold is going, one should possess an acute awareness of where the price of gold has been.  It is important to know that gold WAS in a virtually uninterrupted bull market from late 1999 to 2011 where it rose from below $250 an ounce to an intra-day high of $1,921.  You may remember a few years ago when many Wall Street pundits and commentators were saying gold was going to cruise to $5,000 an once and that easy monetary policies instituted by central banks around the world would surely drive gold to $5,000 per ounce.  As it turns out, ALL these pundits were wrong.

Gold

Since 2011, Gold has been in a consistent downtrend which saw the price drop from $1,921 to 1,130.   A drop of over 41%! Over the past 3 years many gold bulls have been flushed out and many analysts have finally recognized the bearish trend in play.  Right on cue, they have linearly extrapolated this downtrend and put forth bearish calls like “Gold to $800 before $1,500”  and  “Gold for sure on its way below $1,000”.   The main problem these analysts have is their assumption that they can confidently extrapolate linear trends.  Markets are not linear, but in fact non-linear, dynamic, and fractal in nature.   Gold prices are most likely in a multi-year “A-B-C” correction and retracing a fraction of the previous 12-year bull run.

Gold has recently completed the initial 5 waves down in the Elliott Wave sequence which represents wave A of a multi-year A-B-C structure.  The sentiment readings (consisting of overwhelming bearishness) toward gold in the previous months has been congruent with an intermediate term bottom.  Gold day gold hit $1130, the market was full of short positions and almost everyone in the market was expecting gold to continue lower.  Since that time, some very interesting technical and fundamental developments have occurred.

In November, the price action in the gold market was characterized by much speculation of the Swiss Gold Referendum which was a vote taking place in Switzerland which would have forced the Swiss Central Bank to back the Swiss currency by 20% with gold reserves.  More importantly if this referendum would have passed, it would have restricted the Swiss Bank from selling its current supply of gold reserves.  As you can imagine, the prospect of this legislation passing generated a very bearish backdrop for gold.  And as such gold traders bid the price of gold up consistently for most of the month in the hopes the gold referendum would pass.  On Sunday, Nov 30th, the gold referendum failed spectacularly with 78% voting against the gold referendum.  This sent the price of gold crashing Sunday night down to $1,140.  Technically this price action served as a ‘test’ of the November 7th low at $1,130.  Since this price action occurred outside of London and New York market hours, the accompanied volume on the move was relatively light.  Prices did not have enough energy to break to new lows and immediately reversed on Monday from the $1,140 low and surged above $1,220 an ounce on monster buy volume.  This price action also created a massive bullish engulfing pattern on the daily candlestick chart which closed at $1,212 above the previous swing high of $1,208.

To a market technician, it is fairly obvious that there is a significant short squeeze going on right now in the gold market and should continue indefinitely.  If wave “A” down in gold is over, then this is most likely the start of a significant wave “B” up in gold and it should be an enduring multi-month move.  GeoFront Capital is expecting the price of gold to eventually move into the $1,400-$1,500 area some time in 2015 to complete wave “B”.  It is in this area where we will be looking for signs of a wave “B” termination and potential opportunities to go short.

Written by

Phil Olson has been a devoted student of the financial markets since childhood. With over ten years worth of experience trading various investment products, he has developed an insightful way of discerning the price behavior of the market. His trading career took off when he proved to be on the correct side of the 2008 financial crisis by shorting stocks such as Lehman Brothers, Fannie Mae, and Freddie Mac. Since 2009, after capitalizing on the crisis-driven downdraft in financial stocks, he turned his attention to the foreign exchange market and became a successful currency trader. His extensive educational background in the areas of business and finance has afforded him the benefit of being able to apply two types of analysis (Technical & Fundamental) simultaneously to the market in order to identify high-probability trade opportunities. With his distinct and complementary approach to navigating the investment landscape, Phil became a trusted source for financial advice among his family, friends, and co-workers. Prior to partnering with Matthew to create GeoFront Capital, Phil Served as a Captain in the United States Air Force as a Contracting Officer responsible for authorizing, writing, and administering multi-billion-dollar contracts between the Air Force and the Aerospace Defense Industry. His successful experiences in handling large amounts of fiduciary responsibility on behalf of both Congress and the American tax-payer lend themselves well to the financial advisory services of GeoFront Capital.

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