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In the last update, despite being extremely overbought, gold was expected to advance to even higher levels,
for various reasons, principally the COT readings
and the bullish volume pattern. We
gave a target in the $1900 area, and that target was
very nearly attained on Friday when gold
hit $1881 intraday, before
reacting back to close well
well off its day's highs.
Gold is now monstrously
overbought and has finally
caught the attention of the mainstream
media who are all over it.
These factors alone are regarded as making the probably of it reversing soon very high,
and if we look at the charts we can
see good reasons why it should
react back shortly.
On all its short and medium-term oscillators gold is now horrendously overbought. We can see that
on our 6-month chart with gold now super critically overbought on its short-term RSI, with it having
been critically overbought
all this month to date on
this indicator. Meanwhile on its more medium-term MACD indicator it is now
massively overbought - these conditions being reminiscent of silver late in April. In addition it
has opened up a now huge gap with its moving averages.
 
Although it
did not qualify as a bearish shooting star, the candlestick that formed on Friday, with its long upper shadow, is viewed
as an indication of exhaustion, or near exhaustion,
and thus as a warning. After
further consideration of this latest chart
it is suspected
that an intermediate
Head-and-Shoulders top could
be forming in gold as shown on the 2-month chart below, with the price possibly having hit the high of the Head
of this pattern on Friday, after
the Left Shoulder formed earlier in the month, around the 10th. The
volume pattern supports this hypothesis,
with very high volume going into the Left Shoulder and high but lesser volume on the rally into the suspected Head of the
pattern late last week.
When you
stop and think about it, it is not unreasonable
for gold to top out here and take
a rest after after its recent
spectacular run. On our 6-year chart below we can
see that it has risen to hit a target at the upper return line of its long-term uptrend channel. The bird-brained commentators on the telly are now talking about it a lot, and as we know they have a tendency to do that once something has already risen 500 - 1000% as
gold has done after the
last 10 years. Actually, they are not as stupid as we may think,
as one reason for their huge salaries is that they are paid to drum up a market for Smart Money to sell into, once something has risen a lot.
Gold's COT chart looks about the same as
last week, although the Commercial's short positions can
be presumed to have risen in recent days (the chart, not shown, is up to date only as of last Tuesday's
close).
With gold remaining firmly in a long-term bullmarket, there is thought
to be no justification for selling
bullion, which could be difficult
or impossible to replace later. Instead,
holders of bullion may temporarily hedge their positions to preserve gains accrued to date.
Traders in the surreal paper
gold market can likewise hedge positions or take partial profits on holdings here
to sidestep an expected reaction.
One possible reason for gold dropping here would be
a sudden unexpected rally in the dollar, as a spinoff
from a collapse in the euro occasioned
by the deepening crisis
in europe, with further panic funds flowing from plunging stockmarkets temporarily into the dollar and
Treasuries, mainly because most investors can't think of anywhere better to park their funds (hint: try bear
ETFs).
Clive Maund
Trading the precious metals and Energy
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