THE GOLD CHART THAT´S CONVERTING NON-BELIVERS / THE FINANCIAL TIMES ( VERY HIGHLY RECOMMENDED READING )

The gold chart that’s converting non-belivers

By Jack Farchy

I have a confession to make: I don’t believe in technical analysis.


Lots of traders set great store by double tops, head-and-shoulders patterns, ichimoku clouds and the like, but I think it’s bunkum.


Except, I can’t help but admit that the charts are playing a rather important role in the gold market at the moment. Even for a chart sceptic like me, it’s obvious that the 200-day moving average is exerting a powerful influence on the gold market.


First, when gold prices collapsed in September, their apparently unstoppable decline was halted by a wave of buying starting in the mid-$1,500s. At the time, the 200dma stood just above $1,500.


And then this week, the 200dma has acted as a gravitational pull downwards on the gold price. After a few flirtatious glances at it – now at $1,618 – the yellow metal finally broke below the marker on Wednesday, for the first time in almost three years.


I’m not the only person to find myself increasingly engrossed by colourfully-illustrated charts. In fact it becomes a self fulfilling prophecy: the more traders fixate on the 200dma, the more significance it has attained for the market. After it was breached on Wednesday, the gold price promptly dumped another $60.


Indeed, I know a manager of a very large macro hedge fund portfolio who holds a bullish view on gold based on the parlous state of the financial system and believes prices are heading to $2,500 and beyond. And yet, he won’t dream of buying gold now that it has fallen through the 200dma: at least, not after prices have been flushed out a good deal more.


Beyond the day-to-day chart levels (the next one is supposedly at $1,533, for those interested), the amount of focus on short-term trading signals tells us something interesting about the state of the gold market. For the first time since January this year, it is really struggling for direction, with genuine doubt among investors as to whether it is still in a bull market. It is easy to trace the underlying cause.


Liquidity in the system is drying up, putting gold on the wrong side of a “dash for cash” trade among European banks and hedge funds. And more importantly, demand from emerging economies, particularly India and China, has gone soft. Traders tell me they are selling as little as 10 per cent of the volumes they were sending to Asia in September-October.


The critical question, therefore, is whether recent price falls will inspire a return. In the meantime, I am like an atheist attending church.


All I need now is a book about ichimoku clouds...