Bullish Outlook for Gold Still Valid Despite the Recent Pause in the Rally

By: Przemyslaw Radomski, CFA | Fri, Nov 11, 2011
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Based on the November 10th, 2011 Premium Update.


 

This week's events are like theater, with shades of a Greek tragedy. In a play the audience knows that if there is a gun in the first act, it will be fired in the third. Now we're in the second act and so far, the plot is predictable. The script was written back in 2008 when the subprime crisis hit.

This week one of the actors, a wily 75-year-old politician who, in an opera-like plot survived allegations of sex and corruption, finally had to get off the stage. Italian Premier Silvio Berlusconi pledged to step down after the Italian Parliament will approve austerity measures meant to stave off the nightmare scene of a bailout. Italy's borrowing costs rose further towards unsustainable levels on Wednesday passing the key 7% level brushing up against levels that, once crossed by Greece, Portugal and Ireland, led to a quick erosion of confidence that triggered international bailouts. Italy has amassed more than $2.6 trillion in debt and its bonds are among the most widely held in the world. Any hint in this theatrical plot that they might not be worth their promised value could shatter investor confidence.

Analysts are concerned that if interest rates on Italian debt keep rising, the country may no longer be able to afford to borrow on the open markets and instead would have to turn to official lenders like the European Union or the International Monetary Fund. Given Italy's size -- its economy is bigger than Russia's or India's -- it would certainly test the resources of euro-zone nations and the International Monetary Fund. Such a situation, coupled with the deterioration of the dollar, would most likely result in higher uncertainty among investors and in higher prices across the precious metals sector.

Having said that about the more distant future, we would like to move from Italy to gold and take a look at gold's performance for the upcoming short term. Let's start the technical portion with gold itself (charts courtesy by http://stockcharts.com.)

Gold Chart

We begin with a look at the very long-term chart (if you're reading this essay on SunhineProfits.com, you can click the above chart to enlarge it). If you recall what we wrote on October 21st, 2011 (just before the recent rally) in our essay on the bullish outlook for gold:

We are inclined to think that we're relatively close to an upswing in gold. The point here is if a decline is seen before the upswing, it could simply be the formation of a double bottom with the rally yet to come. So a short move down did not invalidate any rally this week since the rally had not yet begun. We have simply seen a rebound after an initial bottom with a second bottom now being formed. As long as the two support levels in the $1,600 range hold, the outlook remains bullish.

Once again, the bullish case appears to be in the cards. From a long-term perspective the recent decline appears quite small. We look at this chart to see if Wednesday's market action is cause for concern.

Given that gold has reached the upper border of the very long-term trend channel based on the 2005-2011 rally, the 1.5% decline seen on Wednesday is not really of great concern. This appears to be quite a normal development and since this same resistance line has been broken recently, it could fail to hold gold's rally when approached once again. In short, the pause in the rally is not something to worry about right now.

$GOLD:UDN - Gold (EOD)/PS DB US$ Bearish

In the long-term chart of gold from a non-USD perspective, gold has reached the upper border of the rising trend channel, a resistance level, which was broken just a few months ago. The resistance level created by previous tops is likely much stronger. The pause is visible in this chart but it is unlikely that the rally has stopped. A move to the level of previous highs seems to be a good possibility.

$GOLD:$XJY - Gold Spot Price / Japanese Yen

Looking at gold from perspective of the Japanese yen, the RSI level of the index is far from oversold and is not giving a "sell immediately" signal either. It seems the time to sell would likely be when the index moves up to around 14.5 - 15, the upper border of the rising trend channel. In the past, RSI levels close to 70 did not coincide with final tops for this index. Generally, an intermediate top was seen followed by a period of additional rally. This seems to be a likely scenario for the coming weeks here as well.

GLD SPDR Gold Trust Shares

In the short-term GLD ETF chart, we see that the decline in gold's price has not changed the short-term trend. Prices are well above the rising support line and insignificantly below the level of the mid-September low. There is still an important resistance line in play, the 38.2% Fibonacci retracement level based on the whole September decline.

The GLD is now verifying a breakout above $172 and appears to be consolidating somewhat. The move above the resistance line close to $174 was not verified, however. There does not seem to be a need to worry as it still appears that an additional rally will likely come soon. In fact, even a move lower, to $170, would not be a reason for concern.

Volume levels this week were low on declines and higher when prices rose. This confirms the bullish, short-term outlook here.

Summing up, the short-term trend for gold remains up and Wednesday's price decline was truly quite small in relation to the size of the recent rally and the daily upswings of the past week. This is a sign of strength especially when considering that the dollar was moving higher as well. It appears that the outlook for gold continues to be bullish for the short and long term.

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Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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