Gold Bullion Setting up for Breakout

 gold bullionA lot of talk has been focused on gold bullion over the past few years. The question I’ve been asked lately is: has this decade-long run in gold prices come to an end or will it continue?

Let’s look at it from two perspectives. From a fundamental stance, recent economic data points to continuing weakness in many if not most economies around the world. We here at Profit Confidential have described in detail the problems occurring and I’m sure many of you also have felt the economic hardships over the last few years. Those issues aren’t coming to an end and the “cure” of money printing by governments around the world will only mean that your wealth and buying power are going to be reduced even further.

Gold bullion has been very volatile since last summer. No market, even gold bullion, moves in one direction in a straight line. Pullbacks in gold prices, as in every market, are perfectly normal. The question a technical analyst would ask is: has the pullback destroyed the bull market in gold bullion? So far, for gold prices, the answer is no.

gold bullion

Chart courtesy of www.StockCharts.com

This is a daily, one-year chart of gold prices. This pattern is what normally occurs with all markets, not just gold bullion. After a long move up in gold prices, there is a period of consolidation. A pullback would be damaging to the overall bullish trend in gold prices if on every move up it was met with more and more sellers. Gold prices in 2012 are entering a tighter and tighter “wedge.” As of today, the market for gold bullion is in fact close to neutral. This is a sign that investors and traders are content with gold prices, as, if it were manifestly expensive, you would see massive selling; and, if it were “cheap,” large funds would be buying gold bullion.

What will happen next for gold prices is that one side or another will want to expand their transactions for more than the market can handle. Meaning, there will either be more buyers for gold bullion than what is available for sale, driving up gold prices, or the sellers of gold bullion will overwhelm the buyers, pushing down gold prices.

We just witnessed one positive sign for gold prices: the low in April was a higher low than the one preceding it. This is a first in 2012 for gold prices. This indicates that buyers of gold bullion are starting to want slightly more than is available. The market for gold bullion is still not yet completely bullish on this one positive occurrence. We would need to see a break above the recent trendline. Many traders and funds are watching $1,700 for gold prices as a key level. A break above that would signify that there is a large amount of demand, which would propel gold prices higher.

 gold prices

Chart courtesy of www.StockCharts.com

The weekly chart of gold prices is an even clearer picture of the last three years. The pace of acceleration in gold prices last year was not able to sustain that rise, which is to be expected, and gold bullion pulled back. We’re now making a very normal wedge in gold bullion. As gold prices tighten up, a break to either side will be of utmost importance, as this will signify the next leg of the gold bullion market.

I would recommend paying attention to the non-farm employment report on May 4, 2012. If we get a bad number that day or on the one in April, gold prices will surge on expectations of additional monetary stimulus. The Federal Reserve doesn’t meet until June and we’ve already started seeing weekly jobless claims start moving up. The economic problems in the U.S. and around the world are not going away. The “solution” most governments think will cure the problem is money printing. As you can see from gold prices, the drop in the value of paper money is driving people to invest in gold bullion for the long term.