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This week’s events are like theater, with
shades of a Greek tragedy. In a play the audience knows that if there is a
gun in the first act, it will be fired in the third. Now we’re in the
second act and so far, the plot is predictable. The script was written back
in 2008 when the subprime crisis hit.
This week one of the actors, a wily 75-year-old
politician who, in an opera-like plot survived allegations of sex and
corruption, finally had to get off the stage. Italian Premier Silvio
Berlusconi pledged to step down after the Italian Parliament will approve
austerity measures meant to stave off the nightmare scene of a bailout.
Italy’s borrowing costs rose further towards unsustainable levels on
Wednesday passing the key 7% level brushing up against levels that, once
crossed by Greece, Portugal and Ireland, led to a quick erosion of confidence
that triggered international bailouts. Italy has amassed more than $2.6
trillion in debt and its bonds are among the most widely held in the world.
Any hint in this theatrical plot that they might not be worth their promised
value could shatter investor confidence.
Analysts are concerned that if interest rates on
Italian debt keep rising, the country may no longer be able to afford to
borrow on the open markets and instead would have to turn to official lenders
like the European Union or the International Monetary Fund. Given
Italy’s size — its economy is bigger than Russia’s or
India’s — it would certainly test the resources of euro-zone
nations and the International Monetary Fund. Such a situation, coupled with
the deterioration of the dollar, would most likely result in higher
uncertainty among investors and in higher prices across the precious metals
sector.
Having said that about the more distant future, we
would like to move from Italy to gold and take a look at gold’s
performance for the upcoming short term. Let’s start the technical
portion with gold itself (charts courtesy by http://stockcharts.com.)
We begin with a look at the very long-term chart (if
you're reading this essay on SunhineProfits.com, you can click the above chart to enlarge it). If
you recall what we wrote on October 21st, 2011 (just before the recent rally)
in our essay on the bullish outlook for gold:
We are inclined to think that
we’re relatively close to an upswing in gold. The point here is if a
decline is seen before the upswing, it could simply be the formation of a
double bottom with the rally yet to come. So a short move down did not
invalidate any rally this week since the rally had not yet begun. We have
simply seen a rebound after an initial bottom with a second bottom now being
formed. As long as the two support levels in the $1,600 range hold, the
outlook remains bullish.
Once again, the bullish case appears to be in the
cards. From a long-term perspective the recent decline appears quite small.
We look at this chart to see if Wednesday’s market action is cause for
concern.
Given that gold has reached the upper border of the
very long-term trend channel based on the 2005-2011 rally,
the 1.5% decline seen on Wednesday is not really of great concern. This
appears to be quite a normal development and since this same resistance line
has been broken recently, it could fail to hold gold’s rally when
approached once again. In short, the pause in the rally is not something to
worry about right now.
 
In the long-term chart of gold from a non-USD
perspective, gold has reached the upper border of the rising trend channel, a
resistance level, which was broken just a few months ago. The resistance
level created by previous tops is likely much stronger. The pause is visible
in this chart but it is unlikely that the rally has stopped. A move to the
level of previous highs seems to be a good possibility.
Looking at gold from perspective of the Japanese
yen, the RSI level of the index is far from oversold and is not giving a
“sell immediately” signal either. It seems the time to sell would
likely be when the index moves up to around 14.5 – 15, the upper border
of the rising trend channel. In the past, RSI levels close to 70 did not
coincide with final tops for this index. Generally, an intermediate top was
seen followed by a period of additional rally. This seems to be a likely
scenario for the coming weeks here as well.
In the short-term GLD ETF chart, we see that the
decline in gold’s price has not changed the short-term trend. Prices
are well above the rising support line and insignificantly below the level of
the mid-September low. There is still an important resistance line in play,
the 38.2% Fibonacci retracement level based on the whole September decline.
The GLD is now verifying a breakout above $172 and
appears to be consolidating somewhat. The move above the resistance line
close to $174 was not verified, however. There does not seem to be a need to
worry as it still appears that an additional rally will likely come soon. In
fact, even a move lower, to $170, would not be a reason for concern.
Volume levels this week were low on declines and
higher when prices rose. This confirms the bullish, short-term outlook here.
Summing up, the short-term trend for gold remains up and
Wednesday’s price decline was truly quite small in relation to the size
of the recent rally and the daily upswings of the past week. This is a sign
of strength especially when considering that the dollar was moving higher as
well. It appears that the outlook for gold continues to be bullish for the
short and long term.
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Thank you for reading. Have a great and profitable
week!
Przemyslaw
Radomski
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