Contributed Commentary for Kitco
A Trader’s Prospective on Gold
By Austin Vernon
The top 3 questions I get asked most of the time:
1) “Hey Austin, what is a key thing to watch for as a gold trader?”
2) “What are you playing?”
3) “Where is gold going next?”
Well I hope to answer all this from a trader’s perspective…
1) “Hey Austin, what is a key thing to watch for as a gold trader?”…
Follow with me… Go ahead pull up a chart and follow along. If we look at a 19 year historical chart of the Philadelphia Gold Index (XAU) we see what makes technical analysts salivate. The few times the XAU got over 90 it exploded.
(cut & paste link: http://finance.yahoo.com/q?s=^XAU&d=c&t=my&l=on&z=m&q=l )
Now look at the past 5 years and notice how many times XAU was defeated at 90. It failed over and over. Do you see the pattern… over 90 – Explosion/break-out! Fail 90 – tank.
So now let’s look at the present… As I write the XAU is getting close to that 90 area, generally the last resistance. If you are a pure technical analyst you will simply just play the chart; If you have lots of gold profits here from the last several months.... you know that you are getting close to XAU 90 and it keeps failing that. So that is a vote for taking profits. If it gets over 90, this index for whatever reason will likely explode. But odds say in the last 5 years, this index is going to fail at 90 again. But this profit taking is for the conservative, you take profits as it nears resistance and wait for a pullback to a trend-line and re enter or wait till it gets over XAU 90 and re enter for the push.
The same technicals apply to HUI... as well as Spot gold, if it approaches 425 and 475.
If you’re more of a risk taker you keep your position as it approaches XAU 90 and wait for the pullback buy and if it does not break trend-line or horizontal trend-line support, you add more to your positions. If XAU 90 fails on the way back up, you can sell. If XAU 90 is broken to the upside and a large push begins as it has done a few times over the years, you add for the 3rd time.
The XAU 90 has proven to be one serious point of attention over the last 5 and 19 years for both “failures” and “breakouts”.
2) “What are you playing?”…
Well if I was stopped by a mugger on the street and he said "O.K. buddy, I’m going to take your wallet unless you can tell me what gold sector stocks you play to take advantages of moves..... I can tell you I could tell them to him from memory; I trade them constantly….
I buy first on gold bounces, the unhedged miners: GLG, MDG, GSS, GG, SIL, AEM, maybe..... GFI, HL, FCX.
Then I go for the Silver companies: SSRI, PAAS, HL, SIL, CDE.
The risky ones that can really move but are dangerous: VGZ, SLGLF, TVX, PMU, KRY, BGO, GPXM, GBGLF, GSRSF, KGC.
On the unhedged side, so more risky but not small penny stocks are: BVN, ASA, ASL, AU, ABX, HGMCY, BMG, ECO, HM.
There are many other worthy precious metal stocks to play, I am simply telling you what I grab on a regular basis to “play” a sector move with as a trader.
3) “Where is gold going next?”
There are some interesting patterns in the price of gold over the past two years. The first pattern is an 8 week trading cycle that extends back two years. A trader friend of mine pointed out 12 periods of two months that exactly match an 8 week trading cycle; two months up, two months down, for two years now. So according to this 8 week trading cycle, we can expect a bottom in the price of gold somewhere around the first week of August and a top somewhere around the first week of October.
There is also an ABCD pattern developing in gold. Again going back two tears followed by a steep decline (B), followed by a modest rise (C) which doesn't challenge the high of the (A) move, followed by a modest decline (D) that doesn't challenge the low of the (B) move. Then the cycle repeats itself. The A moves mark new highs in an operating Bull Market. By combining the 8 week trading cycle and the ABCD pattern, you can almost project a move upward to $425 during the first week of October 2003.
Now naturally, in economics and markets it is never safe to assume things will unfold exactly as they have in the past. There are no guarantees that future patterns in this gold bull market will unfold so neatly and predictable. However if traders begin to think this way, these waves can become almost self perpetuating at least for a while. Of course the underlying, fundamental dynamics for gold, which is driven by the unhealthy creation of huge amounts of fiat money, is what will really drive the gold markets over the longer term, rather than traders who begin to surf discernable waves.
Austin Vernon is an independent equities trader, precious metals investor, consultant to various private hedge funds, and periodic freelance writer for selected subscription based newsletters. For service inquiries Austin may be reached at Clarity Analytics (firstname.lastname@example.org).
Disclaimer: This commentary is written and published by Austin Vernon and is made available to subscribers for informational purposes only. Austin Vernon may directly or indirectly have a position in any of the securities mentioned. Every effort was made to obtain information from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Use of any information or recommendations is at the risk of the reader and the reader is expected to do his/her own due diligence and consult a trusted professional prior to any investment decision. © 2003 All rights are reserved. Parts of this newsletter may be reproduced in context, for inclusion in other publications if the publisher's name is also included for credit and the author is notified.