Gold is poised to break out ... but in which direction?

The global gold price has experienced a long period of low volatility, in fact the lowest in more than two years, and this puts the metal on the watch list once again for investors. Periods of low volatility for asset prices are usually followed by high volatility, accompanied by the emergence of a strong trend.

Investors can use this nature to give themselves an edge.

After a decade-long strong performance, gold has lost its lustre over the past couple of years. Originally, a weak US dollar, inflation expectations and the global financial turmoil left investors searching for a safe haven and gold was the shining star especially between 2009 and 2011 when global equity markets performed poorly. However, after the gold price reached US$1,900 levels in the last quarter of 2011, demand disappeared and prices entered into a correction.

During the last two years, there have been two pauses in the downward trend. We are now going through the second, with the gold price steady for the past year. Another directional move is very likely to take place in the coming months.

A breakout from the low volatility set-up is likely to result in a sharp move in gold prices. A breakout above $1,360 would be a positive signal and result in an uptrend towards the $1,450-$1,500 area. A breakdown below $1,270 would be a negative signal and push prices lower towards the $1,150-$1,200 range.

The current low volatility for gold is illustrated by Bollinger band width, a technical indicator calculated by measuring the difference between the upper and lower Bollinger bands.

The bands are a trading tool created by John Bollinger in the early 1980s. Bollinger bands consist of a set of three curves drawn in relation to securities prices. The middle band is a measure of the intermediate-term trend, usually a simple moving average that serves as the base for the upper band and lower band. The interval between the upper and lower bands and the middle band is determined by volatility, typically the standard deviation of the same data that were used for the average.

Contraction or narrowing of the bands can foreshadow a significant advance or decline in an asset price.

Aksel Kibar is a technical strategist at the Abu Dhabi-based asset manager Invest AD

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