Gold's $1140 Hurdle

March 16, 2010 – Gold has been stopped time and again in its decade-long bull market by recurring hurdles that appear at an ever-higher price. During these encounters, several things happen, most notable of which is the growing bearish sentiment in the face of a seemingly insurmountable price barrier. We are seeing that pattern repeat with gold’s inability to climb above $1140.

It is curious that this pattern repeats. It suggests that few learn from it, and more to the point, that somehow the fundamental outlook for gold has changed each time one of these barriers is hit. It hasn’t. The same factors driving gold higher all decade continue to drive it, mainly the ongoing debasement of national currencies by governments and central banks.

It is also worth noting that the same factors stopping gold at these recurring hurdles, or to put it into technical terms, “resistance levels”, have not changed. It is central bank intervention aimed at capping the gold price.

At each of these key resistance points, central banks succeed for awhile. But eventually the demand for physical gold overpowers their ability or willingness to deliver gold at the then prevailing price. Consequently, central banks retreat and ‘circle the wagons’ at a higher price, which is a phrase I have used as far back as 2001 to describe the actions taken by the gold cartel. Despite the formidable resistance central banks have displayed in recent months above $1140, I expect that they will be forced to retreat again, as indicated by the following chart.

Gold is moving higher from a huge base, illustrated by the “V” pattern in purple lines. Note also the “head & shoulders” pattern within this base formed from 2007-to-2009, the importance of which I highlighted in April 2009.

After the break-out from the base, gold jumped all the way to $1200, but has since been correcting. Importantly, note how strong gold has been throughout this correction. The price did not retreat to the $1000 neckline of the H&S pattern or even to its 200-day moving average. This strength, though subtle, is very significant because it signals the power of the underlying demand for physical metal. It is this demand that I expect will soon send gold hurdling above $1140 and to overhead resistance around $1200.