Gold Hits Eight-Month High. Not Quite Liftoff, But A Countdown Has Begun.

Gold prices traded above $1,900 per ounce last week for the first time in eight months. This was attributable at least in part to the crisis in Ukraine, as reported in this article.

Gold is volatile; it may be higher or lower by the time you read this. Still, that $1,900 breakout is a significant event.

Gold has been trading in a range of $1,700 per ounce on the low side and $1,900 per ounce on the high side for the past sixteen months. There have been a few exceptions in either direction, but they have been very short-lived, usually just a few days or less, and gold quickly fell back into the broad range.

In the past few months, the range has narrowed even further to around $1,775 on the low end and $1,825 on the high side. That’s a formation that technical analysts call a pennant because it’s shaped like a pennant on the charts with a tall vertical line on the left that comes to a point on the right when you connect the highs and lows.

This pattern is described as “higher lows and lower highs.” Gold and other volatile instruments don’t stay in that pointed part of the pennant for long. It’s a signal that gold is going to break out.

The breakout can be to the upside or the downside, but usually, the breakout is a continuation of the trading pattern that gave rise to the pennant in the first place. When that pattern was a sharp rally, it’s called a flagpole because it looks like the pennant is flying on a flagpole.

That’s what happened in this case, which suggests that gold will surge out of the narrow range with a major rally to the upside. Is that what’s happening? It’s too soon to tell.

The recent rally may be just another one of those exceptions to the range-bound trading that soon fades. Still, there’s good reason to believe we may be in the early stages of a major spike upwards.

Part of the reason is that the breakout didn’t just occur above $1,900 per ounce; it actually started earlier at the $1,825 level, which was the narrow part of the pennant. The other reason is that the geopolitical concerns and inflation patterns that gave rise to the breakout are not fading soon.

The good news is that’s it’s not too late to jump on the train. Gold is more expensive than it was just a week ago. But, if this is a major breakout, then $2,000 per ounce and $2,500 per ounce are not far behind. There’s still time to ride the gold train.

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