Gold bugs have a lot to be excited about right now…

For the past couple of months, gold has been forming a consolidating triangle pattern. In the week of July 27, it finally made the move we’ve been waiting for.

A consolidating triangle pattern is a charting term that traders use to spot price movements in an asset. It’s essentially two trend lines that show a series of a higher lows and lower highs. As the two lines converge, the asset normally “breaks out” in one direction or the other.

Once the asset breaks this pattern, the move is normally swift and violent.

Typically, the asset moves in the direction it was going when it formed the triangle. In gold’s case, prices were falling when it started forming the pattern, so we’d expect a move to the downside.

But gold surprised us by breaking to the upside. This is a bullish sign for the shiny yellow metal. Normally, when an asset breaks out of a consolidating triangle pattern, the move has the potential to equal the height of the triangle itself.

In gold’s case, gold started forming the triangle back in March when it was trading around $1,720/oz. If gold maintains its momentum, then it’s not unreasonable to think gold could return to these levels in the not-so-distant future. At the current price of $1,600/oz, that would be a $120 gain from where it stands today.

Risk to Consider: Like all trading patterns, the consolidating triangle model doesn’t take an asset’s fundamentals into consideration. As a result, if the gold market experiences a sudden exogenous shock, the chart pattern may no longer apply.

Action to Take —–> Outside of technical analysis, the fundamentals for gold still look strong. Problems in Europe, ballooning national debt here in the United States and the growing threat of inflation are all catalysts for gold prices in the short-medium term. If gold keeps its momentum after breaking out of the triangle pattern, prices could be headed for $1,720/oz… and beyond.