The Technical Argument for Much Higher Gold Prices

“Profit Confidential” Column, by special guest columnist
Anthony Jasanksy, P.Eng.

Over the last two years, it took five attempts for gold’s price to finally break above the psychological resistance at $1,000 per ounce. Though gold has been in a secular bull market in all currencies, much of the “credit” for the decisive breakout to the all-time high above $1,000 per ounce goes to the sliding U.S. dollar. In contrast, gold has yet to make any comparable breakouts to new all-time highs in the other two big currencies, the Euro and the Yen.

As high as the price appears to be, gold only trades at approximately the 15-year average price in terms of crude oil, copper and silver. The chart of Gold/Crude Oil shows that currently one ounce of gold buys about 16 barrels of crude, close to the average price for the last 15 years. This suggests that the market is pricing gold in a rational way rather than pricing in fear of rising inflation, or of another financial meltdown in the making.

However, when it comes to short-term market pricing, rationality gives way to trading emotions of multitudes of traders of various means, objectives and sophistication. The gold market, including gold equities, has a total capitalization that is only a fraction of the capitalization of equity and bond markets.


As such, it is periodically subject to what, at times, amounts to manipulation by central banks and large financial firms that trade gold for their own accounts and to facilitate market liquidity for gold producers and users. Therefore, unless one is a hardcore gold bug, making new investments in gold, following the latest run-up, comes with considerable risk of short-term pain.

Among the few gold sentiment indicators publicly available are the weekly CFTC reports on open interest (OI) in futures and futures options reported for several groups of traders. The CFTC recently re-classified the categories of reporting traders for 22 commodities, including gold and silver, with the revamped data available back to June 2006 (

The three groups with the largest OI are Commercials, which now excludes Swap Dealers, Swap Dealers as a new separate class and Money Managers. Having different trading objectives and functions, their net positions have dominant bias, with money managers being net long and swap dealers being primarily net short. However, their net positions fluctuate with changes in gold price, and periodically can reach extreme levels.

Presently, Money Managers have held the largest net long position since gold first penetrated the $1,000 mark in March 2008, only to drop by 30% in the subsequent seven months. Swap Dealers that were heavily net short gold in March 2008 have now even larger net short OI. In contrast, at the October 2008 lows, Money Managers were only marginally net long, while Swap Dealers were “even.”

My interpretation of the Net OI of these two groups leads me to believe that gold is due for a pullback towards the previous resistance level, now a major support, around $1,000. An argument for such a pullback can also be made from the technical pattern formed on the gold chart over the last two years.

Edwards and Magee, in their technical classic, regard this pattern as a sort of inverted Head & Shoulders (H&S) bottom. A majority of H&S bottoms mark major trend reversals. In contrast, inverted H&S bottoms appear as consolidation patterns within a dominant uptrend. The measuring formula (distance between the head and the neckline) projects an eventual upside target of approximately $1,300.