Gold Market Update
Originally published March 13th, 2008.
About a week ago we called a short-term top in gold and silver, and although we got one, the subsequent reaction has turned out to be very muted. Meanwhile, oil has powered relentlessly higher and the dollar has continued to crumble as the Fed's increasingly desperate and frequent measures to arrest or at least postpone the gathering financial maelstrom are seen to be impotent.
Since the last update a very important technical pattern has been discovered first on the silver chart and then on the gold chart, which suggests an early end to the corrective phase in gold and silver and implies that the advance in both may be about to accelerate dramatically.
On the 1-year gold chart we can see the trend channel that we had earlier identified, which is still valid, but in this update a parabolic bowl pattern has been added. Note that this bowl does not have such a perfect fit as the spectacular example on the silver chart in the Silver Market update, to which readers are referred. This bowl has some important implications. In the first place it suggests that gold is unlikely to correct back to the lower channel line, instead it should find support at or above the bowl, and if this is the case it means that there is little or no downside from here - it could take off again immediately. Secondly, the bowl points to the uptrend continuing to accelerate, which means that gold should go on to break out above the upper channel return lines shown on this chart, and if this happens it will open up the possibility of a spectacular vertical ascent - which is not far-fetched considering the depth of the impending financial crisis.
Our tactics are therefore as clear as crystal here. We go long and stay long whilst the price remains above the bowl boundary. We know that gold is overbought here, but given the extraordinary circumstances prevailing at this time that won't stop it powering higher. However, we stand ready to close out and possibly reverse positions in the event of the bowl support line failing, which could lead to a plunge.