Gold Market Update

Why can't folks break the habit of being so pessimistic at market bottoms? Not that we're complaining, if they did that would be one less thing that we'd have to go on. With people writing in to say that gold is going to $800, or $700, things are definitely looking up. Funny that, I don't recall them writing in with these targets when gold touched $1000 in mid-February. Sentiment stinks, which is something that emboldens us. Earlier on, we had been in the pessimistic camp too as the pattern that has formed in gold from mid-January does look like a Head-and-Shoulders top that would project the price down to at least $800, but a confluence of bullish factors suggests that we are very close to a bottom, right now.

We will now examine the bullish factors pointing to the imminent birth of a new uptrend in gold. In addition to the important sentiment issue just mentioned, it is clear from the 6-month chart that gold has marked out a classic 3-wave zig-zag correction from its February high. Since the purpose of this retreat was to correct the entire uptrend that started back in October - November, it necessitated a breakdown from this uptrend that does not have longer-term bearish implications. As we can see, this 3-wave correction has brought the price back down to a zone of strong support and close to its 200-day moving average, which are coincident at this time - a very good place for the correction to end and a new uptrend to begin, especially as Stochastics are at their normal oversold limit.

The chart for gold in Euros is also highly encouraging as it shows that against this currency gold has reacted back to classic buying territory in a zone of strong support above a rising 200-day moving average. We have switched to using the Euro instead of the Swiss Franc, as thanks to the Swiss Central Bank’s announced and implemented policy of getting the Swiss to move almost point for point with the Euro, it is now regarded as in effect a Euro clone. Maybe Switzerland is limbering up to join the European Union at last, with the tantalizing prospect of all those bank vaults being opened up for inspection by officials from Brussels and Strasbourg.

If we lift our gaze from the gold chart and look around at what is going on elsewhere, there are definitely a number of synchronous developments going on that are pointing to a resumption of gold's uptrend. One is that silver is completing a fine and very bullish Cup & Handle base pattern, which can be seen on the chart in the parallel Silver Market update. In addition to which copper and crude oil have been improving in recent weeks, indicating that the entire commodity complex is picking itself up off the floor.

Of even greater significance to us, however, as opportunists in junior mining stocks, is the strongly bullish chart for the Canadian CDNX index, which can fairly be regarded as the index chart for junior mining stocks, even though it does include a sprinkling of stocks in other sectors. For on the 1-year chart for this index we can see that it is very close to completing a fine bullish classic Head-and-Shoulders bottom. Once it breaks back above 1000 sentiment is expected to improve rapidly and drive a powerful rally, and it should be obvious from the foregoing discussion that such a rally will be underpinned by a new uptrend in gold and silver.

On clivemaund.com we aren't letting the grass grow under our feet. If people insist on selling quality junior mining stocks at the current absurdly low prices then we have a duty to provide them with a market to sell into. This is why we have been mopping them up again over the past week or two, having traded out of them at a good profit back in February, and will aim to scoop up more of them next week.

Finally it should be noted that gold could drop down a little more towards $850, which would necessitate us redrawing the tentative lower trendline shown, one scenario being a brief rally here followed by a sharp downwards stab that mortifies remaining bulls. Such a move would not negate our bullish scenario and only make make gold that much more attractive. There is a good chance, however, that we saw the final low about a week ago.

The outlook for silver is viewed as very bullish, with a fine Cup and Handle base now approaching completion, that is shown on the accompanying 1-year silver chart.

There are a number of interesting observations that we can make looking at this chart. The first is that once silver broke below what was strong support at the $16 level back last August it went into a severe decline. After initially plunging the rate of decline eased off as it started to form a bowl shaped bottom area that togethor with the recent reaction we can define as a Cup and Handle base. Notice how it accelerated up the right side of the Cup in February, only to come to an abrupt stop and then reverse to break down from from the Cup, an event called for not only by the unsustainably steep rate of ascent of the Cup at that point, but by the price - moving average configuration, for the price had run way ahead of its rising 50-day moving average and also risen some considerable distance through a still falling 200-day, a classic setup for a substantial reaction. Now we have had a most satisfactory reaction in terms of price and time that has brought the price down close to an important support level and resulted in a proportionate Handle to complement the Cup. An important event to observe is the appearance of a large strongly bullish hammer in mid-March when the price spiked down intraday towards support but ended up closing near the day's high. Normally, when the price subsequently drops down near to the hammer low, as it has just done, it presents a favorable buying opoportunity. Observe also how despite the reaction of the past several weeks, the 50-day moving average has made a bullish cross above the 200-day. Finally we can add into the mix that Stochastics are close to their normal oversold limit calling for a probable imminent reversal to the upside.

In addition to what we can see on the silver chart, there are other synchronistic circumstantial factors that are creating an environment supportive of a new uptrend in silver, which have been discussed in the parallel Gold Market update. Briefly these are the fact that gold appears to have completed a 3-wave zig zag correction, copper and oil have picked up recently suggesting an improving outlook for commodities generally, and the Canadian CDNX index, which is the best barometer of gold and silver juniors, has been firming up nicely and is close to breaking out upside from a Head-and-Shoulders bottom, a development that is expected to lead to vigorous appreciation in quality junior mining stock prices.

Clive Maund, Diploma Technical Analysis
[email protected]
www.clivemaund.com

Copiapo, Chile, 11 April 2009