Gold Market Update

Gold has broken out of its large Symmetrical Triangle to the upside, and is now in position for "the big one" - the breakout above the wall of resistance approaching last year's highs in the $1030 area. However, those who are expecting it to accomplish this immediately are likely to be disappointed as its short-term overbought status and especially silver's critically overbought condition and very high Commercial short position are pointing to an imminent reaction, although this reaction should present a great buying opportunity ahead of the major breakout. Some goldbugs who have been getting themselves in a lather in recent days, egged on by their favorite writers, will no doubt get freaked out by a short-term reaction, as many of them are very jumpy at this time.

In the last update we had considered the chances of gold breaking out upside from the Triangle to be much greater than the chances of it breaking out downside, although we remain aware that due to the price pushing into the apex of the triangle there is some chance that the breakout we have just witnessed is false, and if is then it could be followed by the price arcing around and breaking down below the crucial support the apex of the triangle, which would possibly lead to an "end run" collapse similar to that which occurred in copper last year. We are not unduly concerned by this prospect, however, as we have already taken steps to insulate ourselves from harm by means of out of the money Puts and/or stops beneath the apex of the triangle.

So - we are expecting a short-term reaction to present a further buying opportunity. Should the gold price close below the apex of the triangle it will be taken as a general sell signal, especially for those not protected by Puts. If the support at the apex of the triangle holds we can look forward to gold going on to break out to new highs and ascend rapidly, initially to the $1300 area.

Silver has made strong gains over the past couple of weeks as gold has broken out upside from its Triangle, but this rapid progress has resulted in it arriving once again at the important resistance level in the $15.90 - $16.40 area in a critically overbought condition. It therefore stands to reason that it is likely to react back or at least consolidate before significant further gains can be made, especially as the Commercials were piling on the shorts last week - and this is only what we know about as the data is only available up to last Tuesday's close, and it is fair to assume that they rose to even higher levels as silver rose sharply later in the week.

Silver is therefore expected to react back next week, and possibly for somewhat longer, and if it does so we can expect many traders to be rattled by it. However, we will view it as a buying opportunity, provided that gold does not react back below the apex of its Triangle, which would be trigger a general sector sell signal. With gold expected to go on to break out to new highs and advance rapidly to the $1300 area, silver should proceed to break out above the resistance in the $16 area and advance to challenge its highs in the $21 area in due course.

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

Copiapo, Chile, 7 September 2009