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In the last update we had thought that gold might escape its usual
seasonal malaise this year, but it didn�t and went into a rather sharp
downtrend and dropped again quite sharply on Friday. The good news though is
that this drop has not impacted the big picture at all, which remains
strongly bullish, and a bonus is that this drop has flushed out a lot of remaining
weak hands, as we will see when we come to the latest COT charts and set the
sector for a reversal soon leading to a strong uptrend.
On the latest 6-month gold chart we can see the downtrend
in force from early June which on Friday took the price beneath the May low.
Moving averages are in bearish alignment and gold is now oversold on its RSI
and getting oversold on its MACD indicator.
 
On the 20-month chart we can see that gold is being forced
lower beneath a Dome pattern. With COTs and sentiment already becoming
strongly bullish, we would not expect gold to drop further than the blue
trendline shown, especially as bullish seasonal factors will be kicking in
towards the end of the month too. We are therefore looking for gold to break
out above the Dome before too much longer, which will be a strongly bullish
development marking the start of a growth phase.
The long-term 8-year chart continues to show a large Head-and-Shoulders
bottom completing in gold, and on this chart the drop of recent weeks looks
miniscule and as we can see, it has not impacted this big picture at all. If
this interpretation is correct, then we are an excellent point to buy here
from a price / time perspective. It is rather amazing to think that this
bottoming pattern in gold started to form way back in mid-2013.
Gold�s latest COT chart looks increasingly bullish, with
the Large Specs at last giving up and �throwing in the towel� as shown by
their long positions shrinking back quite dramatically over recent weeks, so
that they are now approaching the extremely low levels seen at the December
2015 lows. This is very good news indeed for would be investors in the
sector, and while there is scope for even more improvement, as would be
occasioned by further losses across the sector, the scope for such
improvement is now very limited. Meaning that we are either at or very close
to a major bottom here, so it is good time to load up with the better gold
and silver stocks, and here we should note that this sector tends to be
contra-cyclical to the broad market, so it is likely to do well if the broad
market drops.
Click on chart to popup a larger, clearer version. The
long-term 8-year chart for gold stocks proxy GDX shows a large
Head-and-Shoulders bottom pattern completing that closely corresponds with
the one completing in gold itself, and the validity of this pattern is
emphasized by the persistent strong volume on the rise out of the �Head� of
the pattern, from the late 2015 lows. With the price now near to the Right
Shoulder lows of the pattern, we are believed to be at a great point to build
positions in Precious Metals stocks, especially as we have the luxury of
knowing that sentiment towards the sector is awful, meaning that the mob
won�t touch these stocks with a 10-foot pole, same as late in 2015, with COTs
now looking strongly bullish too, and any further short-term decline will
simply change the picture from very bullish to extremely bullish.
Whilst the 20-month chart for the GDX looks rather scary
and offputting at first as the series of lower lows in the recent past and
downsloping moving averages suggest that nearby support will be breached and
GDX drop quickly to the next support in the $19 area, various factors suggest
a sharp reversal is brewing, although admittedly this could occur on a drop
to about $19. These factors are the tight bunching of price and moving
averages and as mentioned above, bullish COTs and sentiment indicators. Look
for either a prominent reversal candle or candles soon, or a break above the
boundary of the Half Dome shown.
The 6-month chart for GDX shows the action of recent weeks
in detail and how it is dropped down to a support level. Even if this is
breached, the bullish factors mentioned above are expected to lead to a
reversal to the upside before long.
The charts for the dollar index meanwhile continue to look
grim. On the 8-month chart we can see it dropping away beneath a parabolic
downtrend that is accelerating to the downside. If this parabolic downtrend
continues to force the dollar lower it should have a positive impact on the
gold price, although it hasn�t thus far. A break above the parabola by the
dollar would of course be bullish for it.
The 8-year chart for the dollar index doesn�t look
inspiring either. A large bearish Broadening Pattern appears to completing,
and right now it appears to be on course to drop towards or to its lower
boundary, currently at about 90.5. A breach of the lower boundary should lead
to further losses and may result in acceleration to the downside. Further
significant weakness in the dollar should of course be bullish for gold and
silver.
On a more esoteric note, as has been pointed out
elsewhere, gold and silver, and especially silver, tends to reverse at times
of full moons, and we just had a full moon over the weekend, and what could
have been a reversal candle in silver on Friday, so we may be at the point of
a sector reversal here. As pragmatic traders we don�t have to concern
ourselves why this is � if it is shown to work, we can use it.
Finally, while we are considering such matters you may have read of the
big buildup in seismic activity beneath the Yellowstone
super volcano with hundreds of tremors occurring in recent weeks. Timing
its next major eruption is a bit tricky, to say the least, since the last one
was about 640,000 years ago, but it is way overdue apparently and it may just
be an ominous portent that there is a total eclipse of the sun right across
the heart of the US next month whose path of totality runs across Grand
Teton, just south of Yosemite, beneath which lies the vast magma chamber
underlying Yellowstone. This is not to say that this will necessarily
synchronize with a mega eruption, but let�s put it this way, if I was a
Ranger at the park I might choose to take some vacation and go see the
eclipse somewhere safer such as Oregon or South Carolina. It�s just a shame
that the Fed won�t be meeting at Jackson Hole at this time. We shouldn�t
expect the authorities to warn of such a thing of course, they don�t want to
create panic and cause people to scatter, and then be subject to the
inevitable recrimination if nothing happens. Apart from destroying the United
States what effect would a Yellowstone mega eruption have on the price of
gold? This is hard to predict as we have no precedent for something of this
magnitude. One thing we do know is that any manipulation of the gold price by
COMEX will instantly cease as it will be buried under about 8 feet of
volcanic ash, even at its great distance. This could therefore be the time when
the Shanghai Gold Exchange really comes into its own and takes center stage.
You know what they say � it�s an ill wind that blows no-one a bit of good!
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