Gold Market Update

originally published April 4th, 2010
It looks like we have just stepped off the train before it starts to leave the station - in other words it looks like last week's update was DEAD WRONG. While there were sound reasons for being cautious, such as non-confirmation and the overbought condition of the stockmarket, last week's action in the PM sector has greatly increased the chances that it is going to break higher and embark on a strong advance anyway. Have gold and/or silver broken out already with Thursday's strong gains? What pieces need to fall into place to be reasonably sure that a strong uptrend has begun? These are the issues that we will examine in this update.

Starting with the 6-month chart for gold, we can see that despite a positive week it is still within the large trading range that began to form last December, bounded by the important support and resistance shown. Last week we "couldn't see the wood for the trees" when a small potential Head-and-Shoulders was identified that was invalidated by the gains of recent days - the right side of this small pattern was caused by manipulation to knock the price of gold down temporarily ahead of options expiry, which we should have expected. Given the way that gold has rallied well off a point a little above its December lows, this chart doesn`t look at all bad and it now looks like we are seeing a larger Head-and-Shoulders bottom complete above the rising 200-day moving average, which is coming into play to the extent that it could force an upside breakout from the pattern very soon. Note that the "neckline" of the H&S pattern and the important resistance at the top of it are more or less coincident, so it is clear that a breakout above the $1140 - $1160 zone will be an important technical development that should mark the start of a strong advance.

Although gold doesn't look like it has broken out yet on its normal 6-month chart, the very strong upside action in stocks on Thursday suggests that it may be about to, as stocks usually lead gold (the recent relative weakness in stocks was a key factor leading to our caution last week). It is thus important that we examine gold from different perspectives for clues that we may otherwise miss. If we look at the 6-month chart for gold again, this time applying a 3-arc Fan Correction, it is surprising and most encouraging to see that, by this measure at least, it broke out upside this past Thursday. With these 3-arc fan corrections, it is the break above the 3rd fanline, particularly if it occurs not far above a rising 200-day moving average, that triggers a new upwave that takes the price to new highs. However, even though gold appears to have broken out already by this measure, there are various other pieces that need to fall into place in this puzzle before we can be reasonably sure that a major uptrend has begun.

The latest COT chart for gold reveals that Commercial short and Large Spec long positions have dropped to their lowest levels since last September – before the big rally of last Fall began. This in itself is regarded as most auspicious. We should have taken account of this trend last week, even though the levels were not as favorable as they are now.

The pieces that need to fall into place are as follows: silver, which was stronger than gold last week, needs to break above the downsloping line of peaks of recent months (see chart in the parallel Silver Market update). Fortunately, after last week`s impressive action, it is close to achieving this. The situation with PM stocks is complex, as they need to advance in a way that negates the current potential Head-and-Shoulders top, which has been a major concern because the broad market is very overbought and remains vulnerable to a substantial correction. However, in a situation where gold and silver break out upside, and the broad market at least holds its ground, then we could see strong gains in PM stocks. Look out for a big buildup in volume as stocks advance through key resistance levels - if volume does not build up in this way, any advance will remain suspect.

Next we need to see the dollar break down from its uptrend. After its weak performance of recent days, this is now looking much more probable. Recent sentiment towards the dollar has been excessively bullish.

The latest COT chart for the Euro FX strongly suggests that the dollar is topping out and that its uptrend should soon fail.

Finally a useful proxy for gold is SPDR Gold Trust (GLD) on whose chart we can examine the volume pattern. On Thursday, although it made a useful gain, GLD certainly did not advance spectacularly, and volume was light. This doesn`t mean that something is amiss, however, for the rise brought GLD up to the breakout point at the neckline of its Head-and-Shoulders bottom pattern that parallels the one in gold itself. Once gold breaks out upside we would expect to see GLD do likewise on a marked pickup in volume - watch for this, it will be an important confirmatory sign that a major new uptrend is beginning, and a buy signal for GLD itself, of course.

As we likely got off the train at exactly the wrong time a week ago, seemingly just before it leaves the station, and we got the first jolt of movement on Thursday, we are clearly in an awkward situation with regards to reboarding it, which may have to be done in a hasty and rather undignified manner. Readers who concur with the views expressed here should take the action appropriate to their individual situation, which will depend in part on the extent to which you heeded what was written in the last update.