Gold Market Update
Gold has held up well considering the strength of the dollar and even staged a plucky little rally a few days ago, that has resulted in it losing virtually no ground despite the dollar's breakout. This is not surprising as the September breakout was an important technical development which established a sizeable reservoir of support beneath the current price. It was pointed out in the last update that should the dollar break above 90 - 91, gold would be expected to break below $460 and retreat towards its 200-day moving average, and this is what has happened.
The current reactive phase in gold can be expected to continue until the dollar rally has run its course, although as the limited retreat so far and the rally a few days demonstrate, the strong underlying support can be expected to prevent a serious decline. The worst case, in the event of continuing dollar strength, would be a retreat to the vicinity of the 200-day moving average, i.e. to the $445 area, which would be regarded as a buying opportunity in expectation of a renewed uptrend. However, as we will see later when we look at the long-term chart, there is an important long-term uptrend that must hold to keep the bull market in gold alive.
The 1-year chart shows the small top area that developed in late September and October and the reactive phase that is now underway. On this chart we can also see the impressive body of support that now underpins the price - the September rally took the price sufficiently above the preceding lengthy trading range for sellers in that range to rue their decision to sell and want back in, as near to where they sold as possible, thus generating potent underlying support. The 50-day moving average is out of whack with the 200-day - way ahead of it, as a result of the overbought condition that had developed by mid-late September, and this is an important reason for the corrective phase that we are now in.
We will now look at the dollar chart in an attempt to gauge how far the current rally is likely to get, for despite gold's intrinsic strength at this time, this can be expected to determine the extent of the current short-term reaction in gold. Observe that a 2-year timeframe has been selected for the dollar chart, so that we can pinpoint the origin of important dollar resistance.
About a week ago the dollar broke out from a menacing looking potential double-top formation, and it is very clear on the 2-year chart that the strong rally in the dollar this year had stalled out beneath resistance arising from the multiple peaks around the 90 level that occurred during 2004. Examining the action in 2004 we can see that this resistance continues right up to the high for that year, which is at about 92.3. Now, given that the dollar is now becoming extended and overbought relative to its moving averages, which incidentally are now in decidedly bullish alignment, and as shown by its short-term oscillators, following the strong break higher a week or so ago, it is viewed as highly unlikely that it will succeed in breaking above the 2004 highs just above the current level on this run, without first consolidating/reacting. However, the dollar breakout above the potential double-top was, on the face of it, a decidedly bullish development, and after some consolidation in the 92.3 area it could break higher again, and if it does it will be this that pushes gold down towards its 200-day moving average. However as we will see at the end of this update, the dollar COT charts suggests that the dollar is about to top out, at least for the short-term, very soon.
With the retreat from the October high a potentially bearish wedge pattern has appeared on the long-term 5-year gold chart. In the light of the latest dollar strength this will need to be carefully watched. A break of the lower trendline will obviously be bearish, and it will take a break above the top line to obviate the implications of this pattern.
To end on a positive note - for gold, that is, not the dollar, the dollar COT chart should strike dread into the hearts of those long the dollar, at least short-term; it shows the Commercial short positions and the Large Spec long positions going off the scale. This is normally the precursor to an abrupt reversal.