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We exited our short positions in gold for a modest but useful
profit when it broke out of its downtrend towards the end of October. It then
broke sharply lower on heavy turnover in a move that looks capitulative, but
afterwards turned and rose quite sharply over the past week. So the question
now is “has it bottomed?” Although the answer to this question is
“Yes, it looks like it has”, it also looks like it may back and
fill for a little while to complete a base pattern before a sustained advance
can get underway. COTs, particularly for silver, continue to give grounds for
caution and warn that the current turn may be the B-wave trap of a A-B-C
correction. We are aware of this danger and place stops accordingly to
protect us from it.
We can see the
latest action on the 6-month chart for gold below. Gold didn’t quite
make it as far down as our earlier defined downside target at $1660 in the
vicinity of its 200-day moving average, but reversed at a good point for it
to do so, just above this key average. Action last week certainly looks
positive, with it rising day after day on good volume, but by Friday it was
looking a bit tired with a “doji” forming just beneath its 50-day
moving average. This implies that it may take a breather here and back off a
little to form the Right Shoulder of a small potential Head-and-Shoulders
bottom. This would be a “nice” thing for it do technically, as it
would set it up for a strong rise, and it will be nicer still if it does just
that and we buy on such a short-term dip. We therefore look to buy or
increase positions on a short-term dip towards $1700, say in the $1705 area,
with a stop below $1695 to protect us from the C-wave risk mentioned above,
or alternatively on a closing break above $1742 if the advance continues,
with a closing stop at about $1718, which reduces the risk of a whipsaw
– unless that is the dastardly cartel are reading this.
 
On the 3-year chart for gold we can see that overall it remains stuck in a
large trading range bounded by the nearest support and resistance shown,
although the way it has reversed near its 200-day moving average looks
positive. This chart makes clear the importance of the resistance approaching
the $1800 level, as this level has turned the price back 3 times already over
the past year. What this implies is that if it can succeed in breaking above
this level it should then act as a foundation for a breakout to new highs
leading to a major new uptrend.
The latest COT chart for gold shows Commercial short and Large Spec long
positions continuing to ease from the extreme levels of a few weeks back
which all but prohibited further advance. Positions are not yet at levels
which can be described as bullish, but at least there is now room for renewed
advance. Other than this observation, the latest gold COTs are not much use
in predicting the immediate outlook, although the silver COTs continue to
give grounds for caution.
Precious Metals stocks are still in a clearly defined downtrend that began in
mid-September, as we can see on the 6-month chart for the HUI index below,
and would be buyers should generally wait until we see a clear breakout from
this downtrend before moving into the sector, and then quite close stops
should be set to guard against the risk that the breakout is false move.
Of crucial importance for gold and silver, and just about everything else, is
the outlook for the dollar. It has been picking up in recent weeks, as we had
expected, but now it is showing signs that its recovery may be petering out
at a somewhat lower level than we had earlier expected. We had earlier
figured that the dollar index would rally to a target at about 81.70, close
to its high of last January, to complete the Right Shoulder of a
Head-and-Shoulders top as shown on its 1-year chart below, and it still
could, but the action in gold in recent days suggests that it may be about to
top out here, just beneath the zone of resistance shown.
If the dollar rolls over and drops here, in addition to giving the Precious
Metals a boost it is likely to trigger a sharp rebound in the broad
stockmarket, which is now quite deeply oversold as we can see on the 6-month
chart for the S&P500 index below. This was why we hastily took profits in
our broad market bear ETFs on Friday.
Although such a
rebound may now occur, the longer-term charts for the broad US stockmarket
look pretty awful, which is hardly surprising considering the prospect for
shriveling corporate profits and the looming Fiscal Cliff, so it the broad
market rallies we will probably go back into our shorts.
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