Gold Prices in Uncharted Territory

Print This Post | Topic: Gold — December 7th, 2009

With gold trading at over $1225 per ounce recently, we have witnessed a terrific rise in the yellow metal, taking it to new all time highs. For those of us who are long gold, new all time highs are obviously great news, but this situation also brings with it new challenges in terms of technical analysis.

With these all time highs, gold is in uncharted territory and therefore conducting technical analysis becomes more challenging. Where are the resistance levels? Where are the supports? These questions become harder to answer when gold is trading at levels never seen before.

We believe the breakout in gold came when it broke through $1033, a level that it a reached a couple of times previously but failed to break through. Therefore we believe the strongest support is now at this level and it is for this reason we do not think $1000 gold will be seen again for a very long time.

However we do not see gold correcting back to this level, as we have noted on the chart above that gold will get some support at $1150, and more at $1100. One of the reasons that we do not think gold will retreat back to $1033 is the similarity between the pattern seen now with gold breaking $1000, and that seen when gold broke $700 and ran to $1000. We class both these moves as Major Rallies and this is where the real money is made during a gold bull market.

A key feature of Major Rallies is that gold does not correct as many would expect, nor behave as standard technical analysis would suggest. Note that during the Major Rally of Sep-07 to March-08, the Relative Strength Index for gold did not drop much further than 50, and did not correct when it entered the overbought zone above 70. We think this will also be a characteristic of this major rally, with gold rising to over 80 on the RSI as it pushed past $1200, and it will probably not fall further than 50 this time around too.

Therefore we would be strong buyers of gold when the RSI is around 50. At present the RSI is at 56.38, so we may just watch gold for the moment, as it could dip further. In particular we are watching the USD index, which has been in a down channel for some time, it case it breaks out of its channel.

Although we view a rally in the USD as unlikely, we are watching to see if the greenback does break out as this would cause a decent correction in gold prices. However we are reasonably confident it won’t, as the RSI for the USD is now above 50 and at a level that it has struggled to move higher than over the past year.

So overall we see the USD remaining in its down channel, and gold resuming its path higher, albeit with some possible consolidation this week. Further weakness in gold should be seen as an excellent buying opportunity, particularly if the prices drifts towards $1100 and the USD refrains from making a breakout upwards.