Gold investors lured to trade on charts only

Gold investors are bombarded with speculation and news about central-bank policies. In April alone, gold futures lost 8%. As gold continues to lurch back, the noise around gold can seem overwhelming. Many investors are trying to cut out the noise completely and just focus on the charts.

By Barbara Kollmeyer
May 21, 2013, 12:05 p.m. EDT
Market Watch

silver and gold

MADRID (MarketWatch) -- The noise around gold these days is about as loud and frantic as you can get.

Investors are bombarded with speculation and news about central-bank policies, along with economic data, investment banks racing to cut gold forecasts, dollar moves, updates on Indian wedding demand, data on ETF outflows, and on and on.

The end result: A roller-coaster ride that has headed mostly down since mid-April. In that month alone, gold futures lost 8%, and the most-active contract has now plummeted 19% so far this year. After a brief respite from selling on Monday, gold for June delivery GCM3 -0.74% was down another $20 on Tuesday.

Many have declared the multiyear rally to be over, as investors remain scarred by how quickly that April selloff took hold.

As gold continues to lurch back, the noise around gold can seem overwhelming. Which approach works? Charts, fundamentals or both?

“Right now when there’s so much nervousness around, people tend to look at the charts and trade from that,” said Ole Hansen, head of commodities strategy at Saxo Bank. “That’s where you go find where is the potential next level.”

Some investors have tried to cut out the noise completely. Petko Bankoff, who tweets and verbally spars with fellow gold traders under @5koFX, is a 30-year-old trader who makes his home in Veliko Tarnovo, Bulgaria. For a month, he turned off the news about gold and just watched the charts. In a series of emails, Bankoff discussed that month of chart-only trading, a test he ended around three weeks before gold’s dramatic April plunge.

He said the main reason for his experiment was to figure out what was going wrong for him. “Every time I took trades based entirely on my own technical analysis I was profitable, and most of the time when I took in consideration fundamentals, news or other analysts’ opinions—I lost,” said Bankoff, who has been trading gold for four years.

While his experience isn’t as deep as some of the big traders or investment banks’ strategists—he got his start trading currencies with $500 in savings after losing his job as an engineer for search-engine optimization—it may be a valuable one for retail investors lured into gold investing by the metal’s doubling in value in about three years. These investors are now wondering if the gold trade that worked so well when it seemed to be on a one-way path upward has now turned too risky and volatile.

So what did Bankoff learn from that month? “The price action and technical indicators give all the clues a trader needs to take the right side of the trade and make money,” he said.

He said he now relies on his own technical advice and sticks to that, no matter what. The 10% of those who make money, he said, “definitely don’t go with the herd,” noting that most traders, brokers and analysts were bullish on gold for the large part of the last six months.

During the one month of his experiment, Bankoff said he saw 10% growth, while risking less than 1% of his trading capital. “Believe it or not, I didn’t make even one bad trade during this time, as the charts were pretty clear -- there was a classic bull trap pattern on the weekly chart and I was seeing it quite clearly,” he said.

A bull trap is a false signal that downward trend is reversing, when in fact the fall is continuing.

Bankoff credits his conviction and tenacity, along with some fearlessness when it comes to trading, to growing up during Bulgaria’s economic crisis of 1996-97. “The country was on the brink of a civil war, my parents lost their jobs and savings. My little sister and I had to thrash a walnut tree to get something to eat,” he recalls. Ninety percent of trading is about managing your emotions, while the other 10% is technical, he said.

Where the chart-only strategy works, said Saxo Bank’s Hansen, is helping guide intraday and short-term trading. “Traders don’t look at where the market is in a month, they look at where it will be in the next few days,” which is what charts can tell an investor.

Hansen said he relies on a mix of fundamentals and charts. For the short-term picture, he said, “you must look at charts, but on the longer term, you need to look at fundamentals.”

Adam Grimes, chief investment officer at Waverly Advisors, is a firm believer that not only is it possible to just focus on the gold charts, but it can often lead to a “clearer picture, less emotional decisions, and better results.”

“The problem is that much of the news is essentially manufactured after the fact,” Grimes said in a email. “Many professional traders think of most news as entertainment rather than an investment tool (at least using the thesis that once the news is publicly known it cannot be that useful for decision-making), and some do go a step further and disregard most news flow altogether. For that trader who does have the disciplined, statistically proven, and valid investment process, news is often only a complication and a distraction.”

One who disagrees with the chart-only view is Jeffrey Nichols, managing director of American Precious Metals Advisors.

“If you line up all the prominent technical analysts, you’ll soon discover there’s not much agreement about which price points will define support and resistance levels,” said Nichols.

“Do you think that newly rich investors in China or housewives in India care much about chart points? They’re more likely looking at the signs of the Zodiac for clues...or they are acting on long-held cultural beliefs, not what some hotshot in New York thinks about the 90-day moving average,” said Nichols.

Psychologically important price levels can serve as triggers or catalysts that generate reactive buying or selling, he said. But he’s also skeptical that there is any “surefire indicator of future price trends” based on fundamental factors about supply and demand.

“Reporting of key statistics—like Chinese mine production and [People’s Bank of China] central-bank purchases or Indian jewelry purchases and gold-bullion imports from abroad are sometimes intentionally misrepresented or just impossible to accurately measure,” Nichols said.

As for Bankoff, he says he can’t say how well his strategy has performed overall since the major gold selloff began. He won’t know how profitable his trades have been until he closes out positions, but says he won’t close those until “the trend turns to bullish on the daily and weekly time frame.”

But he’s betting on an even bigger selloff, and thinks gold will be below $1,000 if and when the market breaks. “The daily trend is still bearish, there’s a classic bear flag building and until the price is within its range, I remain a gold bear.”

And the gold message gleaned from a month of chart watching remains the same for him now, he said: “Sell, bubble, burst.”

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