Gold Market Update
Originally published August 26th, 2012.
Last week we got what we had expected - and prepared for - for weeks, an upside resolution of the tight standoff in both gold and silver. Actually, gold signaled that it was going to go up several weeks back, when it broke out of the Triangle shown on its 8-month chart below, in late July. The breakout from the Triangle was on good volume, and it then consolidated in a nice tight Pennant pattern before breaking higher to run ahead sharply last week. So is that it - are we on our way now? - almost, but there is one remaining major hurdle left to clear. Before going on to consider what that is we should take note of the fact that gold is now short-term overbought as shown by its RSI indicator, which is entering critically overbought territory, and it has also punched through a still falling 200-day moving average, factors which point to a high probability of it pausing to consolidate or perhaps react back somewhat in the immediate future - if it does keep going higher near-term, the advance is likely to be measured. The fact that the 50-day moving average is still some way below the falling 200-day also suggests that some more time is needed before the major uptrend expected gets into full swing.
On the 3-year chart we can immediately see the one remaining hurdle left for gold to clear before it takes off strongly higher, and that is the important downtrend line in force from the highs of August - September of last year, which also happens to be the third and final fanline of the 3-arc Fan Correction that we had earlier delineated. Quite clearly a breakout above this trendline will be a major technical event - and everything is pointing to gold going on to surmount the resistance at this trendline and enter a dynamic advancing phase, including the volume indicators shown on the chart - the Accum-Distrib line is romping ahead and looks remarkably bullish.
What about the dollar, whose sudden weakness last week was obviously a factor triggering the sharp rally in gold and silver? As we can see on the 8-month chart for the dollar index shown below, its drop`last week has brought it down to a clearly defined important support level, with this sharp move towards a rising 200-day moving average creating a considerable degree of "compression" that coupled with the support at the current level is likely to trigger a rebound. It looks like a Head-and-Shoulders top is forming in the dollar, so a likely scenario here is that we see a rebound short-term which takes the index back up towards the Left Shoulder high in the 83 area, and such a rebound would of course be the occasion for a reaction back in gold and silver, which should be jumped on as an opportunity to build positions further ahead of the major breakout. Here we should note that the dollar looks very weak so it might not make it as high as 83 before it turns tail and breaks down.
In conclusion, the outlook for gold is excellent at this point. It is shaping up to break out of the downtrend in force from last August - September to enter a strong uptrend that should easily take it new highs, with a brief period of consolidation/reaction expected first to unwind the short-term overbought condition arising from last week's sharp rally - and we know that our illustrious leaders, with their addiction to creating money out of thin air, stand ready to assist the continued ascent of gold.