Rally in Gold - Over or Yet to Be Seen?
Based on the October 7th, 2011 Premium Update. Visit our archives for more gold & silver analysis.
The news over the last few weeks, including worries about a possible major banking crisis could cripple the Eurozone economy as a whole, has sent global financial markets down heavily. Many around the world are worried that Europe is about to face a big bankruptcy or sudden default that could set off a new phase of panic in Europe and beyond. It's been nearly two years since the euro crisis began with concerns about the solvency of Greece. Since then it has been a slow-motion drain of confidence and credibility as Europe's leaders have been putting out fires one at a time.
Still, with a new (European) bailout plan ahead, the near time price movements in stocks don't have to be bearish.
The situation is more complicated in case of the precious metals market, because of multiple factors being in place right now. We will start with the analysis of gold itself (charts courtesy by http://stockcharts.com).
Let's take a look at the very long-term chart (if you're reading this essay on SunhineProfits.com, you can the above chart to enlarge). Last week began with sharp declines in gold prices but the direction soon reversed and gold rallied strongly later in the week. RSI levels also moved slightly higher.
Last week's declines tested the support level and since it held, the situation remains bullish. Actually, since there have now been verifications of this support level, the situation is slightly more bullish than it was before. Other than the decline and subsequent bounce, little else has changed in the gold market.
In the long-term chart for gold from a non-USD perspective, index levels did not decline significantly last week although gold's price did (temporarily). This was due to the rally in the USD Index, which pretty much canceled out the decline from a non-USD perspective. The recent breakout here has been invalidated and with a strong support in place, the index is likely to rally from here.
Looking at gold from the perspective of the Japanese yen, we see the usual price action along the lower border of the trading channel of the chart. It appears that a rally is ahead and the only question appears to be whether the index will move to the mid-channel range or to the upper border of the trading channel. There appears to be about a 50-50 likelihood of either move at this point.
It appears that our opinion from an essay on a possible gold rally has been confirmed to a large extent. One week ago we stated:
Looking at gold from the perspective of the Japanese yen, we also see RSI levels now oversold. Recently we have seen a decline that was much sharper than in the past. Each time the upper border of the trading channel was surpassed, index levels quickly moved to the lower border and this marked an important bottom from the USD perspective as well. Such has been the case once again, as the index moved below the lower border of the trend channel and quickly reversed. It is now right at this level. Similar price action patterns have been seen in the past and a rally generally has followed. The implications are bullish for gold.
The implications were bullish back then, and they still are given that no meaningful rally has been seen from the yen perspective yet.
In the short-term GLD ETF chart, once again we see an invalidation of a breakdown. The price action has continued with a sharp move to and briefly below the level of the previous bottom. A quick reversal invalidated the breakdown and prices are now above the 61.8% Fibonacci retracement level. While volume levels have not been significant, this is generally not of concern near market bottoms. It is however, an important factor for local tops in the GLD ETF.
Summing up, the situation remains bullish for the yellow metal although there were some scary moments last week. It appears that we have been through a slight period of price correction and the outlook from here is bullish.
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Thank you for reading. Have a great and profitable week!