Gold Market Update
Originally published June 5th, 2008.
Gold is now in position to begin its next major uptrend, and in relation to where this uptrend is going to take it, it is considered to be at a very good price right now. According to the "Summer doldrums" crowd who are obsessed with seasonal factors, gold has to wait until August to go up, because everyone is preoccupied with Summer holidays, making the most of the good weather, pursuing pretty girls and looking after unruly kids released from the confines of school etc etc. Oh - is that so? - try telling that to Wall St traders who thought they were safe on the beaches of Long Island with their huge picnic hampers last August. So let's get this straight - we no longer live in normal times and the markets are not going to wait on the convenience of people whose minds are not on their work. So if you are planning on strolling down to the station in August to find the train waiting for you, you may find that it left long ago without you.
On our 1-year gold chart we can see the fine uptrend that ran from last August, taking the price from approximately $660 to peak at about $1030 before it turned sharply lower and then proceeded to break down from the uptrend late in March. A classic bull market reaction followed that took the price back to strong support just above the 200-day moving average, after which it has stabilized, breaking out from the downtrend and in the process swinging the intermediate trend from down to neutral as a base area has formed above the 200-day m.a. The breakout from the downtrend was presaged by it taking the form of a bullish Falling Wedge. Even though the low at the end of April was considerably below the low at the end of March, the basing action can be considered to have started with the earlier late March low. Once the price broke out from the downtrend it quickly ran through the 50-day moving average, but as this indicator was still dropping back to close up its gap with the 200-day, it showed that the move was premature and this fact, combined with the overbought MACD histogram shown at the bottom of the chart, conspired to bring about the heavy reaction of the past week or two. Emboldened by this drop, doom mongers have come out of the woodwork and have gotten hold of the ball again, telling anyone who will listen how gold is going to drop to $830 or even lower, when all that has happened over the past week or two is that gold has reacted back to test support at the top line of its earlier downtrend channel, and in the process allow the 50-day moving average to complete its return move back towards the 200-day, and the short-term overbought condition that followed the breakout to unwind.
The reality is that the present situation is very bullish indeed. The downtrend reaction has clearly ended as our chart shows - it has run its course and fulfilled its purpose of unwinding the excesses of the previous uptrend. Having broken out from the downtrend the price has since reacted back into a zone of strong support just above its still 200-day moving average. Now, with the 50-day moving average having reacted back most of the way to the 200-day, it won't take much of an advance to swing it back into an ascending trajectory, and this will result in a very favourable price and moving average alignment that typically occurs at the start of a major uptrend. Thus this latest reaction is viewed as providing an outstanding buying opportunity. Even if the Summer doldrums crowd end up being proved right, the worst we are likely to see is a trading range develop until the late Summer at and above the 200-day moving average. Sentiment in the Precious Metals sector is once again at abysmally low levels suggesting that we are likely to go up from here.
We will end by taking a quick look at the dollar. On our 1-year dollar index chart we can see that the dollar's uptrend over the past 10 to 11 weeks from its mid-March low appears to be nothing more than a weak countertrend rally within a larger downtrend, that has served to unwind the extremely oversold condition existing at that time. Now with the dollar running into the resistance level shown and approaching its steadily falling 200-day moving average, a resumption of the larger downtrend is to be expected, which will of course provide gold and silver with a following wind.