Gold breaks above apex of the compression triangle

In Last few weeks we have identified a simple Western technical indicator known as a pennant formation, and commonly referred to as a compression triangle. It is called a compression triangle because price ranges as well as the highs and the lows of a period of time will begin to contract. Typically, on this type of pattern you will see a series of lower highs, and simultaneously a series of higher lows.

At least in theory the belief is that as the range compresses there is a buildup of energy, that is analogous to winding the spring on a watch. The tighter the range, the greater the buildup of energy. Lastly the belief to this theory is that once prices reached the apex of the compression triangle it will break out significantly, as it releases the energy that was created during the narrowing range. It is also believed that the break out will typically move in the direction of the former primary trend, which in this case has been up.

This particular instance was truly unique in that a break did not occur until it went just past the apex of the triangle. At the same time the most recent lows traded just to the support trendline drawn from the succession of higher lows. Gold pricing also climbed to the upper level of the resistance trendline based upon a series of lower highs. However once gold prices reached the apex it was almost a nonevent in that we saw no major break in either direction.

Today’s strong gain in gold provided technical evidence that a break to the upside occurred after reaching the apex of the triangle. Gold gained approximately $21 in trading today and now contains a very recognizable completion of the pennant formation.

In fact, today’s breakout was so significant that it ended at a three-week high, these gains attributed to market participants analyzing the potential outlook and outcome for the economy once the pandemic runs its course. And this is the key difference between the recession of 2008, and the current global pandemic of 2020. The possible implications and damage that this pandemic will cause will be measured in years and not months this according to many analysts including myself.

The rationale is that regardless of the length of time it takes to produce a vaccine, and or a medical discovery that helps alleviate the length of time that those who have become infected need to battle and conquer the COVID-19. The key difference though between the recession in 2008 and the current pandemic is that we greatly added expenditures from both the House and Senate, as well as the Federal Reserve. In just under two months the United States has added 600 billion dollars to provide fiscal stimulus with the hopes that the stimulus will reignite an economy that has not seen a contraction like this since the Great Depression. However, when you add recent Federal Reserve actions, the United States has entered a new all-time high in terms of the budget deficit.

The additional $2 trillion spent by the federal reserve to purchase assets which are typically mortgage-backed securities, treasuries, and in this instance nonperforming loans that will most likely default. These two factors create an economic fabric that is not been seen before. We now have the largest budget deficit in the history of the United States. We also have the largest balance sheet ever assembled by the Federal Reserve. These two factors have only one inevitable conclusion; massive costs to maintain the interest on the debts and a scenario in which are government’s debt is so large that it will take our children’s children and possibly a few generations after that to effectively reduce the debt that we have added over the last two months.

This is why I have maintained an extremely bullish posture when looking at gold pricing. Of course there will be days where it move strongly higher and days when it move strongly lower but when you look at the big picture what will be obvious is that overall gold prices have been marching to higher values since the end of 2015 when gold prices reached a low of $1020 following the decline from gold’s record high price of $1900 in the middle of 2011.

It is for that reason that I have a stronger conviction to recommend to our readers and subscribers that they allocate a respectable percentage of their overall portfolio in gold over the next year. There are multiple ways to invest in gold, but for simplicity sake I will mention only the most important ones.

First and foremost is the accumulation of physical gold that you should hold in a safe found within your house, or a safety deposit box in a bank. I highly recommend that you buy named coins fabricated and created by the primary global mints. This would include the United States and its Buffalo gold coin, as well as its $20 gold piece. The other option that will cost a little bit less when you purchase it is to buy name brand bullion. Especially in bullion is critical that you obtain it from a refiner that is beyond reproach. Johnson Matthey is the first refiner that comes to mind, however there are multiple refineries that will deliver gold on tampered with.

The other way to invest in gold is accomplished either through the futures market, or ETFs such as the following mining stocks. Within the multitude of mining stocks there are two that I believe will outperform the rest of the complex the first one is called Nugget with the symbol of NUGT. The second ETF that comes to mind is the GDX. Both of those electronically traded funds offer some leverage approximately 3 to 1 with nugget and the GDX. Lastly but not highly recommended is the accumulation of GLD which is a fractional way to buy gold that you do not store and is extremely liquid in terms of buying and selling that item.

Lastly there is a technique and a product that can provide the most lucrative profits, with the caveat that there’s no free lunch and there is a potential that this derivative provides the greatest percentage drawdown and losses. I am speaking about the futures market in which you control 100 ounces of gold for approximately $15,000. Because the value of gold at its current pricing is $1738, the value of that contract is $173,800. And that is the double edge sword because while potential for phenomenal profits exists, it is equally possible to take devastating drawdowns. Based upon their enormous leverage in the futures contract our recommendation is that you should allocate only a small percentage of your investment capital that you have earmarked for gold. However, you decide to accumulate or trade gold is up to you, and has to be based upon your tolerance for risk. The good news is if gold does what many analysts including myself believe which is to rally to him much higher prices challenging $1800 an ounce, before creating a new all-time record high, you will be able to profit from such a move if that in fact does occur.

Wishing you as always good trading and good health,

Gary S. Wagner