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Gold: the ugly duckling of a bull market

The gold market is often referred to as a hedge against inflation or an insurance policy against global uncertainty.

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Source: Bloomberg

Gold is a commodity with only a very small amount – 10% – being used in the manufacture of goods, excluding jewellery.

Many market calls are made by “gold bugs” about its mostly bullish price targets, based on the impending collapse of economies or markets falling on hard times.

Trumponomics has ushered in the “animal spirits” often associated with early bull markets on the belief the world will become a better place. The US bond yields suggest impending inflation and economic growth in the US – still the world’s largest economy.

“By way of a guide around current market pricing, and if we include the December meeting, the interest rate markets are now pricing 2.6 hikes through 2017 and 4.3 through 2018. Prior to the election, the market had priced 1.7 hikes through 2017 and 2.4 through 2018.”
- Chris Weston, IG

One of the most popular ways to trade gold is via the spot market, where traders can take long or short positions based on their views going forward to profit from coming moves. Volatility in gold can be impressive, with moves of up to 3% within hours.

This brings in the important point for traders: there are times of the day where gold has the potential to provide better opportunity. For example, the midday Australian session tends to be the quietest, with the most active period being the Asian equities market open and European equity markets’ open.

The weekly chart below shows a “view” based on the head and shoulder pattern. The $1100 price target is conditional on a continued move or a failed retest of the neckline. Before considering a position, the trader would be looking for an entry point based on his/ her trading plan, which includes the exit point if the view proves to be wrong. Outside periods (OP) have a high probability of marking market highs and lows; statistics show the high or low to be in place within 3 bars 92% of the time following an outside period. This head and shoulder chart pattern has the OP marked in December before the 2016 rally and also shows the OP marking the June top followed by the OP from Trump’s election as president.
 

How to trade this pattern

Head and shoulder patterns offer a longer-term trading view. The neckline is the key element in the pattern: a retest of the pattern at $1260 and price failure from this level is the confirmation needed to show the pattern is real. This price rejection offers scope to trade a short position on the break of last week’s low at $1203.

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