DOATFT: Gold, silver & platinum issue buy signals as they breakout of long consolidations

In today’s Diary of a Trend Following Trader (DOATFT), I go long gold, silver and platinum as the precious metals breakout of long consolidations.

The minutes from the latest Federal Open Market Committee (FOMC) released yesterday suggest that Federal Reserve policy makers are ready to provide more stimulus if the US economy doesn’t improve soon. According to Bloomberg, many members of the FOMC said further action would probably be needed “fairly soon” without evidence of “substantial and sustainable” improvement in the recovery. There has also been increasing speculation that China will ease monetary policy amid signs that its growth is slowing.

The precious metals, in particular gold, were also likely spurred on by recent World Gold Council data showing that in the second quarter global central banks purchased 157.5 metric tons of gold. This is the highest quarterly level since central banks became net buyers of the yellow metal in the second quarter of 2009, and is significantly higher than the 66.2 tons purchased in the second quarter of 2011. If central banks continue to buy gold at the current rate, their gold purchases will total around 500 tons this year, easily surpassing the 458 tons of gold bought during 2011.

In related news, exchange traded product holdings of gold have risen to a record level of 78 million ounces. Meanwhile billionaire investors George Soros and John Paulson added to their holdings of gold. SEC filings for second quarter showed that as of 30 June Soros Fund Management had more than doubled its investment in the SPDR Gold Trust to 884,400 shares, compared with the previous quarter. Paulson & Co. increased its holdings by 26% to 21.8 million shares.

According to the Wall Street Journal the pair “cite a continuing threat of financial turmoil in Europe, the prospect of additional U.S. monetary stimulus that could erode the value of the dollar… and the risk that long-dormant inflation could return” as their reasons for increasing their holdings of gold.

Other factors that are bullish for gold include the fact that the price has now broken above the 200-day moving average – an important technical level which could well trigger more buying. Also the rising cost of gold production has put a floor under the gold price at around $1,300.

As for platinum, the recent violence in South Africa, the metals biggest supplier, has disrupted operations and has caused its price to spike.

I mention all of these bullish fundamental factors to make one very important point. None of it matters. As a trend following trader I care only about price. None of this other information is relevant.

What matters to me is that these metals are breaking out of long consolidations, and as I have said before, the longer the consolidation, the stronger the breakout tends to be, and all four precious metals have been consolidating for quite some time:

Metal

High

Date of high

Consolidation period (months)

Gold

$1,923.70

6 Sept 2011

11

Silver

$49.82

25 April 2011

16

Platinum

$1,976.70

12 August 2011

12

Palladium

$862.00

22 Feb 2011

18

 

A 14 month chart of gold

A 14 month chart of gold

Chart courtesy of stockcharts.com

On Tuesday gold reached $1,643.60 making a new 55-day high, however I didn’t manage to buy it until yesterday when I brought it at $1,648.50.

A 14 month chart of silver

A 14 month chart of silver

Chart courtesy of stockcharts.com

Yesterday silver reached $29.89 making a new 55-day high. I brought it at $29.83.

A 14 month chart of platinum

A 14 month chart of platinum

Chart courtesy of stockcharts.com

On Tuesday platinum reached $1,511.00 making a new 55-day high, however I didn’t manage to buy it until yesterday when I brought it at $1,516.00.

A 14 month chart of palladium

A 14 month chart of palladium

Chart courtesy of stockcharts.com

Yesterday palladium reached $634.70 which isn’t yet a new 55-day high so it remains on my watch list.

It’s worth noting that closing prices have no special significance to trend followers. Therefore if the price reaches a new 20-day or 55-day high at any point during the day, it qualifies as a breakout.

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