Gold Market Update
Originally published November 25th, 2012.
It was a big day for the Precious Metals sector on Friday, for the dollar broke down hard from its recent uptrend, and at the same time gold broke out upside from its Head-and-Shoulders base pattern. Silver anticipated this - it broke out from its base pattern back on Tuesday. These developments have grave implications for the dollar, but at the same time are believed to mark the start of major uptrends in gold and silver.
On its 6-month chart we can see how gold dipped to our 'buy spot' just above $1700, detailed in the last update, in the process marking out the Right Shoulder of the small Head-and-Shoulders bottom that formed just above its 200-day moving average. Everything is now in place for a significant uptrend to get going, with the breakout on Friday from a fine completed base pattern, and the MACD indicator showing that there is still plenty of immediate upside potential from here.
The 3-year chart is useful as it makes clear that there is an important resistance level overhead, approaching and at the $1800 level, which has turned the price back on 3 occasions over the past 13 months. It is thus clear that the surmounting of this resistance will be a strongly bullish development that should quickly lead to gold challenging its all-time highs, resistance at which should not prove to be much of an impediment, and it should then go on to break out to new highs and carry on up in a vigorous uptrend.
Gold looks just fine on its long-term chart going back to the inception of the bullmarket. It got over-extended by the latter part of 2011, which is why we have since had the lengthy period of consolidation. Now it is looking ready to break out to new highs and enter another major uptrend, and if it should make a run at the top return line of its long-term uptrend channel, as looks likely given the outlook for the dollar, then we are looking at a target for this uptrend in the $2700 - $3000 area - perfectly reasonable.
The long-term chart for gold also makes clear that all of the talk about it being manipulated and suppressed is arrant nonsense. With it having risen from about $250 at its low at the start of the bullmarket to its latest peak around $1900 last year, it doesn't look like the manipulators have had much success, does it? The fact of the matter is this - if currencies get debased, and they are being debased at an ever increasing rate, then gold, which is real money, is going to go up to compensate. That's all that there is to it, except for the fact that when hot money shows up on the scene in force, that is when these 'bedrock' gains resulting directly from currency debasement are going to be compounded by a speculative mania and that hasn't even started yet.
The latest COT chart for gold shows that while Commercial short and Large Spec long positions are on the high side, they are not at levels that should give rise to serious concerns regarding the potential of the nascent uptrend, given the other bullish factors that we have observed.
The recent deep unpopularity of PM sector stocks relative to gold is a sign that the sector has been out of favor, and is therefore an indication that we are, or close to a bottom. This ratio is showing its 2nd worst reading since the surge out of the bearmarket bottom late in 2000, the worst being that of the 2008 panic selloff.
Beautiful technical action in the dollar. On Friday it broke down decisively from the modest little uptrend of recent weeks that took it up to mark out the Right Shoulder of a fine large Head-and-Shoulders top. On the 6-month chart we can see this recent action in detail, and how the advance failed beneath heavy overhead resistance, and was signaled in advance by 2 successive bearish 'shooting star' candlesticks.
The 18-month chart for the dollar shows it is now dropping down to complete the Right Shoulder of the Head-and-Shoulders top. This may take a little while yet, but once the support at the bottom of this important pattern fails - and the Fed are doing everything in their power to make sure it does - then the dollar could plunge. So US readers should book and pay for their overseas vacations without delay and change over your holiday money too.
In conclusion, gold is viewed as having broken out on Friday to start a MAJOR uptrend, and thus it is certainly not too late to go long or add to existing positions, and one can guard against the (now considered remote) possibility of this rally being a B-wave trap by simply placing stops, either below the support at $1700, above which the Right Shoulder formed, or below the early November lows.