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Gold’s breakout from its giant 5-year base pattern has had to wait for the
dollar rally to run its course, which it now appears to have done, and this
being the case, gold is now free to break out into a major bullmarket that
looks set to dwarf all prior ones. We have in the past described gold’s base
pattern from 2013 as a complex (multi-shouldered) Head-and-Shoulders bottom
and while this description is still valid, it is perhaps more simply
described as a Bowl or Saucer pattern, that is shown on its latest 10-year
chart below. For one of these patterns to be valid, volume should build as
the price starts to rise out of the Saucer, and as we can see, that is indeed
the case, and with the price now being driven by the ascending Saucer
boundary towards the resistance that marks its upper boundary, breakout looks
imminent. If we stop and think about the growth of debt and money supply
whilst this giant base pattern has been building out, it is clear that gold
has a lot of catching up to do.
 
Given that gold’s base pattern can also be described as a
complex Head-and-Shoulders bottom as mentioned above, it is easier to look at
it in terms of that on a 3-year chart. On this chart we see the Head of the
pattern and the messy Right Shoulder and that gold’s overall trend is now up,
with it being driven at the key resistance by the trendlines shown and also
by the rising Bowl or Saucer boundary, which it is not practical to show on
this chart, but which from glancing at the 10-year chart, we can see is now
approximately where the upper trendline is. Breakout must occur within a few
months, and while it could happen at any time, the best time for it from a
seasonal perspective would be August – September. Whilst this may seem like a
long time to impetuous types, it’s not after a 5-year buildup, and any time
remaining to breakout affords us the luxury of being able to buy up the best
stocks and adjust portfolios etc, so that we are able to reap the maximum
advantage from the bullmarket, which will feel even better, because while
most PM sector investors will be making money, the majority of the population
will be getting poorer in a hurry. Before leaving this chart it is worth
observing that gold has held up very well in recent weeks, given the
magnitude of the dollar rally during this period, which is a positive sign.
The 6-month chart shows us recent action in more detail,
but otherwise it is of little use technically, and is actually deceptive,
because it shows gold trending lower, but we know that longer-term charts
reveal that the larger trend is up. On this chart we see that moving averages
are still in bullish alignment, but there is an impending bearish average
cross if the price stays down, so we will want to see it advancing again
soon, which is what we are expecting.
Gold’s latest COT chart showed some deterioration last
week, which could lead to a minor dip, but overall we have seen an improving
trend in readings since late January, with Commercial short and Large Spec
long positions moderating from fairly high levels. Whilst readings could be
better, they are not at levels that would prevent a breakout by gold from its
giant base pattern, and there is scope for improvement in coming weeks ahead
of the breakout, if it doesn’t happen immediately.
Click on chart to popup a larger, clearer version. It’s
always interesting to look at gold in other currencies. On our 5-year chart
for the gold in euros, we see that it near to the bottom of a large uptrend
channel and looks set to rally back towards the upper boundary again. Given
that the dollar looks set to drop back, which implies a recovery rally in the
battered euro, this further means that gold should rally even more against
the dollar…
For the euro to recover, we need to see an easing of the
acute crisis centering on beleaguered Deutsche Bank, especially as this bank
holds vast quantities of derivatives and thus constitutes a major systemic
risk. So it relevant here to see what the charts are saying about Deutsche
Bank stock. The latest 6-month chart for Deutsche Bank is actually
encouraging and implies an easing of the banking crisis in Europe, at least
for a while, for as can see the stock plunged into a high volume capitulative
selling climax late last week, that left behind a bull hammer on the chart,
and although the price range of the hammer was not impressive, volume was and
suggests that it is done falling for now and could soon rally, which would
probably lead to a rally in the euro too. We can presume that the Cabal
running Europe will “move heaven and Earth” to stop it crumbling further.
Turning now to the dollar we know that it has had a strong
rally since the middle of April, which we will examine not on the chart for
the dollar index itself, but on a 2-month chart for the reliable dollar
proxy, the Invesco US Dollar Index Bullish Fund, code UUP, the reason being
that we can observe its volume pattern and volume indicators. The rally in
UUP (and thus the dollar) from the middle of April has taken the form of
bearish Rising Wedge, which shows an advance that is losing impetus, and thus
at growing risk of reversing. Early last week there was an interesting and
bearish development when UUP gapped out of the top of this converging
channel, only to gap back into it the next day on much heavier volume, action
which left behind a bearish “Island Reversal” on the chart, while the dollar
index itself put in a “Bearish Engulfing Pattern” on its chart. Since then it
has broken down from the uptrend by virtue of moving sideways with very heavy
downside volume developing that has caused volume indicators to weaken
rapidly. This is viewed as very bearish and suggests that the dollar has
peaked, which if true, is clearly good news for gold and silver.
So how does the dollar look on longer-term charts? – is
there anything to indicate why it should top out here? There is – on the
2-year chart for the dollar index we can see that it has arrived at a
resistance level at its highs of last October – November in a very overbought
state, and is looking toppy here. Very heavy lopsided short positions had
built up before this rally started and so it could largely have been driven
by self-feeding short covering, and if that is the case it is headed south
again. Big reasons for the rally fundamentally were the banking crisis in
Europe coming to the fore again and the Fed having set up an interest rate
differential between the US and the rest of the world, but if the crisis in
Europe should ease, at least for now, as suggested by the high volume selling
climax in Deutsche Bank stock a few days back, and the market come round to
thinking that the Fed will abandon at least some of its planned rate rises,
then there is plenty of scope for the dollar to drop back again, especially
given the accelerating abuse it is being subjected to via the exponential
ramping up of debt.
The 5-year chart for the dollar index shows that a giant
Broadening Formation has been building since early 2015, which is bearish,
but before breaking down it often leads to a period of wild and erratic
trading.
Complicating matters is the latest dollar Hedgers chart.
This presaged the rally of recent weeks, but as we can see, readings have not
eased very much despite the significant rally. In itself, this suggests
either that the dollar rally has further to go – which contradicts the strong
evidence that we have seen on the 2-month UUP chart calling for a drop – or
that the dollar will react back to support in the 91 area before advancing
again.
Click on chart to popup a larger, clearer version. Chart
courtesy of sentimentrader.com The dollar optix chart on the other hand
has risen to levels that could trigger a dollar reversal and drop…
Click on chart to popup a larger, clearer version. Chart
courtesy of sentimentrader.com
Finally, we should remind ourselves of the underlying reasons for the
massive and unprecedented incubating bullmarket in gold and silver, which is
that the debt and derivatives mess is now totally out of control, and unlike
back in 2008 there is nothing to fall back on to avert the impending major
crisis – there is very limited scope to drop interest rates and the money
supply has already been vastly inflated by QE. Basically, they have two
choices – to try to bring things back under control by hiking rates further
and QT (Quantitative Tightening), which given the mammoth debt structure will
lead to a devastating economic implosion and widespread social unrest, or to
engage in further can kicking by reverting back to QE so that debt expands
exponentially, and given the nature of politicians we know which route they
are likely to take. At this latest stage of the fiat cycle this will
eventually take us over the cliff into hyperinflation, which is a very
effective way of eliminating debt, because it makes it worthless. Needless to
say, when paper money no longer has any value, gold and silver will then take
center stage.
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