Gold Market Update

Gold ran at its highs of last March, before reacting back heavily, as expected and predicted in the last update. The 1-year chart makes very clear why it has reacted back so. It hit the upper return line of a steep uptrend channel in a very overbought condition as shown by the RSI and slow stochastic on this chart, and various other oscillators that are not shown. Hence it had very little chance of following through with a breakout to new highs, as we had earlier observed. Despite its retreating back from the vicinity of its dollar highs there can be doubt that recent action has been bullish and augers well for the future, for with the break above the October highs, gold can be seen to have broken the trend of lower highs and lower lows that dogged it last year, with the result that all its principal moving averages have swung into bullish alignment - and it has broken above the last restraining fan line, opening the door to another major upleg. While it is true that the reaction of the past week has resulted in it breaking down below the support line of the large Cup or Bowl pattern shown, this line had become unsustainably steep, so that what is now expected to happen is for a "Handle" trading range to form to complement the Cup, which will allow time for the current overbought condition to unwind and for gold to gather the strength to stage a decisive breakout to new dollar highs. In determining how far gold is likely to react short-term to define the lower boundary of the anticipated trading range we should note that it did not break high enough above the October highs for them to provide much support on the way down. It is therefore thought more likely that it will react back to the vicinity of the lower boundary of the steep uptrend channel and its rising 50-day moving average which are currently close to each other. This means that the current reaction is likely to continue to the $890 - $900 area before the price reverses to run back up to the top of the range again in the $1000 - $1050 area where it is likely to stall out again. Note however, that it is now short-term oversold, so we are likely to see a brief rally next week before it drops back to the target area.

It is important not to get too hung up on gold's performance in dollars. On the dollar chart gold's performance does not look that impressive - after all it hasn't even made new highs, but try looking at it against most other currencies and you will quickly realize that it is in a robust bullmarket. The chart for gold in Swiss Francs shown below serves two purposes - it makes it abundantly clear that gold is in a vigorous bullmarket and it makes it obvious why gold has just reacted back, for it had arrived at the upper return line of a major long-term uptrend channel in an unprecedentedly overbought condition, making a reaction almost inevitable. Against the sickly Euro gold even broke out above the top of a similar channel, but this move was a "throwover breakout" marking exhaustion of the intermediate uptrend.

Fundamentally it should that clear that gold's robust bullmarket is set to continue and accelerate, notwithstanding any short to medium-term pause, for the nations of the world are actively ballooning their money supplies at an enormous rate in a desperate effort to stave off the current deflationary implosion, and maintain a competitive advantage by devaluing their currencies. With this kind of broad based dilution going on gold is an obvious magnet for those seeking capital preservation, and its finite supply should result in its price being driven up not just in nominal terms but in real terms too, and once the market perceives that gold is rising in real terms the inflow of funds is likely to ramp up even more, causing the uptrend to accelerate.

The dollar is now at a critical juncture, as we can clearly see on its 1-year chart, for it is in danger of forming a Double Top with its highs of last October - December. While we cannot rule out a surprise breakout to the upside, it is thought to be much more likely that it will turn down shortly, which is certainly suggested by the convergence of the uptrend channel that has developed following the December low. An initial drop by the dollar index back to the support in the 84 area would be expected to coincide with gold advancing back up into the resistance zone towards the highs again.

We sold most of our gold and silver stocks several weeks ago in anticipation of a heavy reaction, which we had bought at the November – December lows, and bought Puts in several big golds before last week’s break lower for speculative gains or as insurance, and will be looking to buy back into many of these stocks once the reaction has run its course.

Silver has behaved pretty much as predicted in the last update, advancing further before breaking down sharply below the Bowl support line shown on the 1-year chart. However, we had expected a clear break above the resistance around the $14 level to lead to a swift run at the heavy resistance around and especially above the $16 level, and for it then to collapse back. In the event it staged a deceptive breakout above $14, when it looked like it had cleared this resistance, and then collapsed back to break down below the Bowl support.

Having broken down beneath the support of the bowl, silver is believed to have entered a reactive phase that is likely to see the price retreat back across the uptrend channel shown towards its lower boundary, and we should note that this retreat is likely to take a zigzag pattern and not be fooled by the brief rally that is likely to punctuate it.

Like gold, silver is thought likely to mark out a "Handle" consolidation pattern that complements the Cup or Bowl on its chart and leads eventually to renewed advance. This Handle consolidation will likely be bounded by the support level shown in the $12.50 area and the $14 resistance level. In regard to this a break below the lower boundary of the uptrend channel as the consolidation pattern develops will not be regarded as bearish, but a break below the support level would be. Successful completion of the Handle consolidation should lead to a serious assault on the major resistance level in the $16 - $17 area.

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

Copiapo, Chile, 1 March 2009