Gold Market Update
Gold has now made a clear break above the key $430 resistance level and is in position to advance to the $480 - $500 area. This accords with the US dollar which, although oversold, looks set to plunge.
The 1-year chart for gold shows how the price has now broken well above the resistance at the double-top highs of last winter and spring. With this hurdle cleared the rate of rise is expected to accelerate into a "slingshot advance" as the parabolic uptrend driving the price higher gets steeper.
The 3-year chart gives us a target for the move at the upper long-term trendline, in the $480 - $500 area. This is a minimum objective as this larger uptrend can be expected to get steeper if a dollar crisis develops.
The dollar chart from 2001 is placed below the 3-year gold chart for comparison, note the different time scales. It can readily be seen how gold's breakout corresponds with the dollar's breakdown below support at its lows of last winter. Having broken down below this key support, the dollar now looks set to plunge to its lower long-term trendline shown on the chart.
The 1-year dollar chart is a grim picture - not only has the key support in the 84.60 - 85 area failed, as already mentioned, but the index also failed to find support at the return line of a potential intermediate downtrend channel, signalling extreme weakness. Being oversold did not save it, and will probably not save it going forward.
Many gold stock investors remain "spooked" by the underperformance of gold shares relative to bullion and the fact that shares have, so far, failed to break out to a new high, as can be seen on the 3-year HUI index chart below. I believe this is nothing to worry about and that continued progress by gold will lead to a sharp breakout above the key 260 resistance level on the HUI.
The return of the current Republican administration on November 2nd was a major bearish development for the dollar. Bush and the Republican Party may be popular in places like Kansas and Oklahoma, but they are disliked intensely and even feared and hated around the world - this is a statement of fact and has nothing to do with the personal opinion of the writer, but it is a fact that may contribute considerably to the choking off of funds flowing to the US. The United States is running huge deficits, and is now dependant on a massive influx of foreign capital to keep going. The US may call the shots militarily, but its creditors now call the shots economically and countries such as China and Japan could send the dollar into freefall anytime they chose to if they started to unload the vast quantities of dollar denominated assets they now hold on any significant scale. There is an argument that they would be shooting themselves in the foot if they did so as they would implode their major export market. Against this must be set the fact that there are many other fast growing markets to export goods to, especially in the rapidly expanding Asian region, but the main question now is how much longer these creditors are going to stand and watch as the value of their dollar assets haemorrhages on a gargantuan scale. The danger now, as our charts clearly show, is that there could be an all-out stampede to dump dollar assets, and possibly an unprecedented plunge, and I don't think I need to tell you the effect that would have on precious metal prices.
Many readers will have noticed a marked increase in mainstream media coverage of Iran's possible development of nukes over the past few weeks. This is very similar to the propaganda that was broadcast about the "weapons of mass destruction" before the attack on Iraq. It is considered unlikely that the US will attack Iran in the near future, due to its forces being bogged down in the Iraq quagmire, so it may be left to Israel, which has been supplied with ordnance for the purpose, to precision bomb the Iranian facilities. The most likely gambit will be to first attempt to deplete the Iranian economy through sanctions. However, Iran is not Iraq, and any military attack on it either by Israel or the US, which the Arab world regard as the same entity, could have dire consequences, including a huge spike in oil and precious metal prices. We will be considering the consequences of such an attack in the next Marketwatch Oil, which should go up on the site within a day or two.