Chart of the week: A low risk/high probability trade

It's down sharply from its 2016 peak, but technical analyst John Burford thinks this share is starting to look very interesting.

Randgold is back on the launch pad

Gold miners have had a terrible press in recent months – and no wonder, the gold price has been in a state of near-collapse. This, while US share indices have been rocketing and thus removing the 'safe haven' rationale for buying precious metals, which is conventionally (and totally erroneously) given to the precious metals.

In fact, when you look at the historical record, when stocks are in a bear trend, gold usually follows along (as does silver). That is because the demand for assets declines as does the price when the mood turns negative. Even an authority no less worthy than the CME Group recently issued an erudite piece headed: Has Gold Lost Its Safe-Haven Status?

•    An ideal setup for a short squeeze

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Think of this: If gold is such a safe haven in times of economic turmoil, why are natives of Venezuela not clamouring for gold, rather than dollars just to buy food?  A gold sovereign in your pocket in that country would find few people to exchange with, although a bank might give you a sackful of Bolivars.  Lucky you!

The bearish case against an imminent gold rally rests on the widespread belief that since no economist expects a US recession any time soon, gold should continue on its downward path as it loses its 'safe-haven' status.  Hmm.  And we know how most market predictions of the economists have fared when compared with actual experience, don't we?

So, with sentiment against gold miners so negative, what do the charts say?  Do they back up this uber-bearish thesis?  Here is the weekly Randgold Resources Ltd chart covering the last five years:

Source: interactive investor      Past performance is not a guide to future performance

Early in 2016, as the gold price improved, Randgold shares took off, rising from the £30 area to a high of £98 in July 2016.  And it did it in five clear Elliott waves.  That was a textbook move, especially as it sported an extended fifth wave that is entirely typical in natural resource shares.

That is because at the end of a strong bull run in a commodity, panicky thoughts of scarcity are running amok.

And from that high, the market declined in classic three large waves A-B-C where the C wave at the current £50 level appears to have completed - and bang on the Fibonacci 76% retrace and with a strong momentum divergence to boot.  This is starting to look very interesting.

For added clues, I will go to the daily chart:

Source: interactive investor      Past performance is not a guide to future performance

The latest decline is also in a five down and on a strong momentum divergence.

To my mind, we have a low risk/high probability trade here – and in the classic Buy Low/Sell High category.

Many cautious investors would say: "Never try to catch a falling knife!"  I say:

"When the evidence stacks up for a major turn, getting in early is smart. If wrong, we have a good stop loss strategy to limit the loss.  If correct, we can brag to our amazed friends about how we bought at the low."

If this is correct, I expect a push up past the upper 'tramline' in short order and then on to my first target in the £60 region.  After that, I have much higher targets.

So, let's see if gold has truly lost its 'safe-haven' status or has taken on another.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.