Explosive gold price movement ahead. But up or down?

September 1st, 2009

Share |

In Marc Faber latest market commentary report, he highlighted the fact that gold prices had been range-bound since February this year. But as the months progresses, the price range gets narrower and narrower:

Gold prices trading range

In technical analysis, this type of price formation is called a “pennant.”. A pennant is like a spring coiled up, ready to jump at any moment. As the price range narrows, it can be interpreted to mean that buyers and sellers are getting more and more polarised and entrenched in their convictions regarding the next move for gold prices.

This means to price volatility for gold will be upon us soon. The question is, which way? Up or down? Marc Faber opined,

I lean toward the view that gold will break out on the upside. The only problem I have, however, is to reconcile my relatively positive view about the price of gold (and other precious metals) with a rebound in the US dollar and a correction in equities. Of course what could happen is first a rebound in the US dollar and a brief correction in gold and equity prices before these short term trends – driven by further monetary easing – reverse, and gold (as well as other commodities) and stocks move up again in tandem.

However, our view is that should the precious metal prices fall (in the context of correction in equity prices and rebound in the USD), the fall may be quite substantial (we could be wrong here). This is because others traders and speculators are also watching the pennant formation in gold prices and should the break-out prove to be on the downside, they’ll be likely to press the “sell” trigger.

Another possibility is that in the coming correction, gold prices and USD may go in the same upward direction. That happened before last year as US Treasuries and gold were rising simultaneously (in the context of capital flight towards safe havens after the collapse of Lehman Brothers).

Ladies and gentleman, what are your bets? Up or down? For options traders, they can bet on both by buying in-the-money call and put options.

Tags: , , ,