Gold Market Update
Originally published September 21st, 2008.
Although gold staged an amazingly powerful rally last Wednesday and Thursday, some are worried that the reaction on Friday, seemingly in response to the newly hatched "bailout plan" by the government and the Fed, marks the start of a slump back into obscurity as the bailout plan "works", so that last week's sharp rally turns out to have been nothing but a temporary spike. So let's make several things clear.
First the strong rise last week was not a spike but a powerful breakout move that marks the start of a major uptrend. Second, the bailout plan will only "work" to the extent that it succeeds in pushing off the debt and liabilities of banks and brokers etc onto the taxpayer and any foreigners who are crazy enough to buy US Treasury paper. This is the real purpose of the plan - to rescue cronies and pals on Wall St at public expense. Thirdly, the bailout plan is hugely inflationary as the money to finance it will have to be electronically created, and it is thus very bullish for the Precious Metals. Finally, it is naive in the extreme to assume that foreigners will continue to finance this circus by buying endless streams of US Treasury paper. The increasingly desperate and reckless actions of the government and the Fed are risking cutting the jugular of the US, the T Bond market - bonds plunged on Friday as predicted on the site last Wednesday, a move that is believed to mark the start of a savage bearmarket. A collapse in the bond market will send rates through the roof and implode the already extremely fragile US economy, weakened as it is by massive debt overhangs.
On the 6-month gold chart we can see the breakout move on Wednesday and Thursday and how it broke the price clear above the line of resistance shown and also briefly took it above its 3 principal moving averages, the 50, 200 and 300-day. The reaction back on Friday is quite normal given the magnitude of the preceding rise that quickly generated a short-term overbought condition shown by the MACD histogram at the bottom of the chart. Given the enormously inflationary implications of the bailout plan, it is hard to see gold reacting back much further - on the contrary it is likely to continue higher soon, and the vigor of the brakout move implies that it won`t be long before we see new highs.
On the long-term gold chart we can see that, as pointed out in the last update, it never looked bearish, even after the steep reaction of recent months. While there is clearly a substantial body of resistance residing in the sizeable intermediate top area of earlier this year, the magnitude of last week's advance shows that gold "means business" and should have little trouble in going on to overcome this resistance and continue on to new highs in due course and it should be noted that the hugely inflationary implications of the bailout plan coupled with the prospects for a collapsing dollar could easily result in an accelerating trajectory out of the top of the channel shown.