Platinum's Warning for Gold

By: David Nichols | Tue, Aug 5, 2008
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Gold is coming up on its moment-of-truth -- and a potentially great spot to re-enter long positions, as we recently took profits up at $966.

Gold is in a very clear "triangle" consolidation period, which is the typical way that parabolic up trends re-energize following a hyper-growth period. Often these consolidation periods can last a year or more.

So far gold's triangle consolidation has been quite benign, and clearly bullish, and if gold turns around after a brief undercut of the lower boundary line -- as expected -- it will give us a perfect re-entry to catch the next leg up.

Subscribers to the Fractal Gold Report already have specific instructions on when to get back in on the long side, as we've been waiting patiently for this re-entry since the sell signal up at $966 back in mid-July.

But there is another scenario that gold bulls need to be aware of, and that is what is happening in platinum, which is suffering through a shocking decline as it tumbles out of its triangle consolidation. This could have been a highly bullish consolidation pattern in platinum, but any bullishness inherent in the post-spike triangle pattern has been obliterated over the past month.

Most commodities are in consolidation patterns following spike highs caused by the collapse of the dollar, so it's important to recognize that platinum could be the "canary in a coalmine" that is warning of danger for all commodities, including the bull market pattern in gold.

If gold breaks down out of its very clear triangle, the downside target could be as low as $680. Often such a breakdown move is very swift, as we're seeing now in platinum. Such an obviously serious breakdown can create a feedback cycle in a market, where the energy releases to the downside with barely a pause.

So again, gold investors need to be aware of the potential for this same type of swift breakdown, if the triangle in gold does not hold up.

Another template for such a breakdown came from copper back in late 2006, as it tumbled down very quickly after a triangle consolidation following a spike high.

Copper quickly recovered from that brutal one-way decline, and platinum will undoubtedly recover as well, but it's important to note that it was this breakdown in copper that started a multi-year consolidation period, and copper has not really made any serious progress above the high from 2006.

So for gold I'm bullish for another strong leg up to start very soon, and we are poised and ready to re-enter if we get our specific trigger. Gold could easily rebound as high as $965 on this next leg up.

But we also want to be aware of the potential for a serious breakdown in gold, similar to what happened in platinum and copper under similar circumstances. If this is the case, it will throw the gold market into turmoil, and the only way to survive such a period will be with hedges and short positions.

Please follow this link for more information on the Fractal Gold Report, which also includes a daily report on equity markets, as well as reports on silver and platinum for subscribers on the annual and 2-year subscription plans.



David Nichols

Author: David Nichols

David Nichols
Fractal Gold Report

David Nichols

David Nichols publishes the Fractal Gold Report, a daily report covering the gold market using proprietary techniques that go beyond technical and fundamental analysis. The Fractal Gold Report is available by subscription here. Fractal Gold Report Disclosure.

David Nichols is a graduate of Yale University and a leader in the emerging field of fractal market analysis. This pioneering analytical approach studies the markets as chaotic, non-linear systems, addressing the predictability in financial markets. Fractal market analysis discovers the order hidden within the seemingly random chaos of the markets.

David is the editor of the Fractal Market Report and the Fractal Gold Report, daily subscription newsletters written in an easy-to-understand style that cover the markets using his proprietary techniques that go beyond technical and fundamental analysis.

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