This week we have
seen gold and silver move lower, just like I mentioned a week ago. Gold
closed the week below $1000, and silver topped exactly in tune with the
cycles that I mentioned in the previous essay. Where do we go from here and
how fast? Let’s take a closer look on charts (courtesy of http://stockcharts.com) and
see what may be waiting just around the corner.
The long-term chart
confirms what I wrote last week - that gold rose a little too fast for the
rally to be sustainable. Consequently, we have now entered a consolidation
phase. For now, it does not seem that gold will
spend much time correcting the preceding move. It has closed
several days above the long-term trend line (blue thick line on the chart
above), so the breakout above it has been confirmed.
The price of gold
failed to move above the 2008 high so far, but once we go above it, we shall
see some real action in this market, especially considering the high volume
that accompanied the beginning of this rally. Things look promising, because
every barrier below the 2008 has already been taken out. Anyway, a move lower
to the upper border of the previously mentioned triangle pattern is not out
of the question in the short term.
The final outcome of
this situation depends on how situation develops on other markets, with the
USD Index being the most important one at this point. I will get back to this
market later in this essay, but for now let’s take a look at
gold’s little brother – silver.
When I first
mentioned the remarkable self-similarity in the silver market (red rectangles
on the chart above), I knew that the pattern is an important factor when
estimating the future performance of silver for the next several days at
least, but it turned out that the Jan-Feb performance was a perfect
roadmap for the whole September rally. This outstanding similarity has been a
great indicator so far, but it virtually has to become less reliable in the
future, as history doesn’t repeat in every detail at all times –
The current situation
on the gold market suggests that the irregular (in terms of the ongoing
self-similarity) is likely to surprise us positively. When gold breaks up
through the 2008 high and verifies the breakout I expect silver to move
quickly higher, even if the pattern suggests further consolidation. Still,
for now it seems that silver may need to go a lower before resuming its
Before I proceed with
analyzing the U.S. Dollar, as one of the key factors determining short- and
also long-term price swings of the precious metals, please take a look at the
performance of PM stocks relative to the general stock market.
we see above is a long consolidation after huge rally. This is really
encouraging from the long-term point of view, as the rally that follows such
a consolidation is often similar in size to the move that preceded it. If PM
stocks manage to break out soon, we could see some real fireworks in the
sector, for instance the GDX would equal the value of the SPY ETF. I realize
that unless general stock market plunges, this means HUI above 800,
but this is what the above chart suggests, and what I expect to take place
sooner or later.
The USD Index is
currently correcting the September downswing, and it might have already
completed it, though this is not the most probable outcome in my view. There
are several factors that make me think that we may move a little higher -
above 77 but not higher than the 78 level.
The declining trend
line (thick blue line) provides a solid resistance right now, and it has not
been reached yet. Moreover, the breakdown below December 2009 low has not
been verified yet, and a brief move higher from here would verify it. Last,
but not the least, the RSI Indicator is not yet at the 50 level, and it was
the level that meant the end of a correction in the past few months.
The analysis of the
USD Index suggests that it is likely to move a little higher from here, which
would mean exactly the opposite action in the PM sector. In my view, the two
most likely scenarios at this point are: gold (along with silver and mining
stocks) goes a bit lower to the upper border of the triangle pattern, or gold
moves higher right away. The outcome depends to a huge extent on the dollar
and the way PMs react to weakness in the main stock indices. The first factor
is favorable in the medium-term, but suggests caution in the short run, and
as far as the second one is concerned, it is still too early to make any
calls. I will let my Subscribers know, once we have more information. For now, I
believe that we will see PMs reach new highs in 2009.
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by Przemyslaw Radomski