Gold Market Update
Originally published July 11th, 2007.
There are several factors coming together now to suggest that a powerful rally in gold is drawing near, and because they are so clear and potent, they do not require a long-winded description.
On the 2-year chart for gold we can see how it has stabilized above an important support level in the $635 - $640 area over the past few weeks. This after having broken below a long-term trendline dating back to mid-2005 that may have caused some to short the metal and who thus must be growing increasingly concerned at the lack of downside follow through, although they are probably finding solace in gold's insipid performance over the past week as the dollar has fallen sharply.
What makes the current situation so potent is the fact that all of gold's moving averages are now bunched tightly together along with the price itself. This is a rare technical event that typically spawns a big move - and with the long-term moving averages still trending upwards, the odds favor a breakout to the upside. A fascinating point to observe, which has been remarked upon before, is that gold has found support and turned up at or above its 300-day moving average throughout its bull market, only breaking below it once in mid-2004, and now it is positioned just above it - and the much more commonly used 200-day.
With gold having rounded over earlier in the year beneath the heavy resistance towards last year's highs and then entered an intermediate downtrend, there was clearly a danger that it was "double topping" with those earlier highs. However, for various reasons this danger is thought to be receding. Not least of these is the recent COT data. A couple of weeks ago we observed that the COT structure was at its most bullish since early January, after which time gold went on to rally by about $80, with the Commercials' short positions having shrunk to a level which in the past has marked a turning point, and sure enough gold has started to turn up again. On the latest COT chart, shown below, we can see that the Commercials' short position has increased noticeably over the past week, although it is still at a level regarded as bullish. This has coincided with gold rising up into its still falling 50-day moving average, so we may see some more backing and filling before the anticipated larger advance gets underway. Gold remains beneath the resistance of a Distribution Dome pattern and in the recent past it was mentioned that buyers could either buy with a stop below $635 or buy on a break above the Dome resistance. This strategy remains valid, although because of the close stop it is thought to make more sense to buy here. Buyers and holders should remain aware of the capacity of big market players to generate a whipsaw false breakdown below $635, and so be prepared to reverse positions rapidly. The stakes are high here - and big money would love nothing better than to shake out the little guy and mop up his remaining holdings before the big move.
The widespread assumption that for gold to rise significantly the dollar has to break down below its crucial long-term support at 80 on its index may not be true. This is because rampant currency inflation and debasement is not a phenomenon confined just to the US dollar - it is now occurring across a broad front worldwide, in part due to the practice of competitive devaluation - and is actually necessary to prevent a disastrous liquidity crisis developing, which has become a chronic and intractable threat due to the proliferation of debt, debt instruments and derivatives. We live in a world in which the population is expanding, growing wealthier, and the money supply in many countries is growing inexorably - in other words money and the ability to create more of it - and thus debase its value - is infinite, whereas the supply of gold and silver is finite and cannot be greatly increased. This is a recipe for an ongoing long-term bull market in the Precious Metals.