A sandwich pattern

After Christmas, come inevitable cold turkey sandwiches. Gold is looking to trace out a similar technical pattern, with very short-term and very long-term indicators positive, but some intermediate messy and bearish volatility.

Short-term bread: Since early December, the price has miserably lagged most other assets, with some calling for panic, after this summer’s “blow-off” peak. Thin holiday trading and end-of-year liquidations pressured the gold price, while equities were carousing. Short-term, oscillators look “overbought”, which suggests a corrective rally possibly soon due.

(Per this chart, for example, RSI [relative strength index] is hugging its lower range; MACD [moving average convergence/divergence] has just breached its midline, showing a flicker of some strength on the horizon.)

Medium-term filling: Investors will vacillate between deflationary and inflationary scenarios. Deflation is the watchword right now, as various worldwide economic slowdowns grind on. It even trumps geopolitical risk – gold barely reacted to Kim Jong-il’s death. But quantitative easing and money printing may take their inflationary toll down the road. On December 8, gold spiked on a false rumor that the European Central Bank would sell bonds and amass sovereign debt, an inflationary move. After that report was discredited, investors rethought their kneejerk reaction.

Gold recently breached its 200-day moving average, and bears contend that finally violated a long trendline. But the all-important slope of the moving average remains fairly flat, a less drastic sign. Moreover, on a logarthymic basis, the metal could plummet as far as $1,250 (£809), and maintain the 2002 trend intact. (Technicians often prefer exponential scales for longer duration charts.)

Long-term bread: Notwithstanding, many analysts still expect the metal to retest its 2011 highs in 2012. They note that the dollar, chief rival as a safe haven, faces its own pressures: gridlock in Congress, loss of purchasing power (98% compared with gold’s, since 1975) and the American M2 money supply up 9% this year.

Louise Yamada reminds that gold’s decade-long run up requires “an extended period of repair/consolidation” and “we do not believe this process is over.” Back on December 6, when the metal was still on a tear, she presciently warned that it might dip toward the 1515 level. Patience is in order.