Can Gold Extend Its Rally?

While it hasn’t affected gold significantly, the price of oil has fallen quite dramatically over the past couple of months, and that’s bad news for oil companies.  Profit margins are shrinking and layoffs could be coming, if the situation doesn’t improve.

If oil continues to decline, the shale oil producers could get into serious trouble, and that could send America back into recession.

Mainstream media promotes the idea that lower oil prices are good for consumers, but most consumers are deeply in debt, and it’s questionable whether lower oil prices are going to lead to any increase in consumer spending.

All investor eyes should be focused on the upcoming OPEC meeting in Austria.  It takes place on Thursday, which is Thanksgiving Day for Americans.

That’s an oil options chart from Goldman Sachs.  It suggests that the price of oil will move up or down by about $3.60 a barrel, as the OPEC production decision is announced.

This chart shows US oil production reaching nine million barrels a day. 

High prices are needed to keep that production growth in a rising trend. 

Even if OPEC were to announce a major cut in production, that would only create a further rise in US oil production, putting renewed pressure on OPEC to cut production again.

It’s a self-defeating exercise for OPEC to keep cutting production, while America increases production.  Thus, I expect only token action to be taken by OPEC this week.

How would a failure by OPEC to cut production affect the price of gold? 

That’s the daily gold chart.  Note the position of the 14,7,7 Stochastics oscillator.  The lead line is near 80, suggesting the gold rally from the $1130 area lows is “long in the tooth”.

If OPEC disappoints commodity bulls, I think gold could decline, but only modestly, to the $1170 - $1180 area, and it might do so in anticipation of the OPEC decision.

For any market to continue to rally in a technically overbought situation like gold is entering into now, it needs a catalyst to do so.  Is there such a catalyst on the horizon?

That’s the daily chart of the US dollar versus the Japanese yen.  There’s a 14,7,7 Stochastics sell signal in play, and the dollar has definitely lost upside momentum over the past week.

In the big picture, gold has performed admirably, while both the yen and oil have collapsed.   

If the yen can begin to rally, gold could gallop higher, to the $1250 - $1255 area, even while being technically overbought.

It’s important for Western investors not to get overly-obsessed with the fear trade for gold, and ignore the love trade. 

The city of Dubai has long been recognized as the “city of gold”, and rightfully so.  Five hundred jewellers are now in forces to build the world’s longest piece of gold jewellery, to promote the industry. 

The love trade (gold jewellery) has always been the biggest and most consistent driver of the gold price.  I don’t expect that to change, regardless of what happens in America.

The good news is that jewellers in China, India, and Dubai are in expansion mode, and it’s clear that Western mining stock shareholders stand to reap substantial reward from the relentless growth in gold jewellery demand.

That’s the daily chart for GDX.  It’s performing “according to plan”.  There’s clear sell-side HSR (horizontal support and resistance) in play in the $20 area, and the rally has stopped there. 

Simply put, the traffic light has turned red, and the gold stocks sports car has stopped.  After a brief rest, I expect higher prices. There’s nothing I see here that is fundamentally negative for gold stocks.  Nothing.

Gold stocks are well supported by the enormous expansion in the global gold jewellery business, and so is silver.

Silver tends to substantially outperform gold in the later stages of a rally, regardless of whether that rally is short term or long term.  A move above the black downtrend line should attract lots of hedge fund buying, and extend the rally.  A two day close above $16.75, should get that job done!  

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