Gold’s Point-Figure Signals Further Declines: Technical Analysis

Jan 06, 2014 4:07 am ET

Jan. 6 (Bloomberg) -- Gold is poised to extend the biggest annual drop in three decades to the lowest since September 2009, according to technical analysis by Commerzbank AG.

A high pole on a point and figure chart formed from mid- October to the beginning of November, as shown by a column of Xs, which was followed by a reversal, as shown by Os. A 45 degree resistance line also formed from April and both scenarios are bearish, Commerzbank said. Prices may drop to a range of $1,140 to $960 an ounce, probably in the first half of this year, based on vertical downside targets calculated from the high poles seen in August and October, the bank said.

“High poles show near term weakness,” Axel Rudolph, a senior technical analyst at Commerzbank in London, said by phone on Jan. 3. “In November, the chart was confirming the bearish reversal signal of the October high pole. It’s bearish as long as we’re below the 45-degree line.”

Gold slid 28 percent in London last year, the biggest drop since 1981 and the first annual decline in 13 years. Investors sold 869.1 metric tons through bullion-backed exchange-traded products in 2013, more than was purchased in the previous three years combined, as some lost faith in the metal as a store of value. The Federal Reserve said Dec. 18 it will trim monthly bond buying because of an improving economy and global equities reached a six-year high last week.

Gold for immediate delivery reached a six-month low of $1,182.27 on Dec. 31 and traded at $1,241.22 today in London. Prices, which slumped 35 percent from a record $1,921.15 in September 2011, were last at $960 in September 2009.

Technical Analysis

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

Point and figure charts gauge trends without showing time or volume. Rising patterns are indicated by an X while falling prices are shown by an O. The Xs and Os are called boxes. Movements are measured by a pre-defined unit called a reversal, and the default for this unit on the Bloomberg terminal is $3.

A high pole is a spike of Xs against the trend, followed by a column of Os, with the Os going down by at least half of the previous height of Xs, Rudolph said. Downside price targets can be calculated by multiplying a column of Os with the box size and reversal size and subtracting that sum from the preceding highest column of Xs.

“The daily 10 X 3 point and figure chart is telling you that gold remains in a downtrend,” Rudolph said, referring to a box size of $10.

Gold has traded below its 200-day moving average since February last year and held below the 100-day measure from November. Prices will drop to $1,110 in 12 months, Goldman Sachs Group Inc. wrote in a Dec. 5 report.

--Editors: Claudia Carpenter, Sharon Lindores