Gold Market Update

By: Clive Maund | Sun, May 22, 2005
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Since the last update the dollar has broken out upside from its long-term downtrend and gold has broken down from its long-term uptrend. However, the situation remains finely balanced as these breakouts are not yet major, when viewed on long-term charts, and the dollar on Friday attained a short-term target stipulated in the last update, and is now overbought and just beneath a zone of heavy resistance. This means that any further gains, short-term, will be hard-won. That said, these breakouts are serious developments, and the risk is that, after consolidation or minor reaction to alleviate the overbought condition, the dollar continues to forge ahead.

We can see these developments on the long-term 4 year charts for gold and the dollar, which for convenient cross reference, are placed together. The big difference to note when looking at these charts is that the dollar has already rallied to meet its short-term target at its adjusted less steep channel, but gold hasn't, and would have to drop to the $400 area to meet its target at the adjusted uptrend line.

In the last update it was stated that the dollar was being squeezed between its rising 50-day and falling 200-day moving averages, which were rapidly converging, and that this would force a decisive breakout before much longer. This is what happened, and it was a breakout to the upside, which we can clearly see on the 6-month chart. This was a significant move that not only blasted the dollar sharply above its 200-day moving average, but also above an important resistance level. However, it is certainly not "home and dry" as it is now considerably overbought and just beneath a much stronger zone of resistance, shown on the 4-year chart - this means that the boys who are working the levers via the offshore banks are going to have their time cut out if they expect to generate much more upside over the short-term.

Not surprisingly, this dollar strength caused gold to buckle and break below its long-term trendline. This breakdown, which still looks marginal on the long-term chart, looks more serious on the 2-year chart, where we see that it involved a rather nasty breakdown from the symmetrical triangle pattern that had formed from early December.

While the continuing support immediately beneath the current price could yet reverse the current downtrend, it does now look set to retreat towards trendline and "round number" support at the $400 level. It is important to note that should this occur the gold stocks, which are believed to have largely discounted such a move, are quite likely to hold the all-important 150 support level on the HUI index, provided that gold bottoms in the $400 area and does not break down further towards the next important support in the $375 area. As already discussed elsewhere, a breakdown by gold below $400 and subsequent decline to the $375 area, would be expected to result in a breach of 150 by the HUI index and a rapid decline to the 100 area.


Clive Maund

Author: Clive Maund

Clive Maund,

The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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