On Thursday the dollar reversed dramatically to the downside and on Friday
gold broke out upside, with both developments being predicated by the most
bullish gold COTs for 14 years.
On gold's 3-month chart we can see that, after trying the patience of
bulls for weeks as the COT pressure cooker intensified, gold finally broke
out on Friday. This was a big decisive breakout on strong volume which COTs
indicate is "the real deal". Fortunately the COTs were already so
bullish a week ago that we went long ETFs, stocks and Calls before the
breakout. As we can see, even after Friday's big move, there is lots more
upside potential here, as gold is still heavily oversold on its MACD and way
below its 200-day moving average.
Moving on to the 1-year chart, we can see why gold is turning up now, as
it is at a classic cyclical low near to the bottom of the large downtrend
channel shown. While it remains a fact that it is still in a downtrend, and
its moving averages are still in bearish alignment, the super bullish COTs
indicate that the least we can expect to see is a rally to the upper boundary
of the downtrend channel, with the most being a breakout from the downtrend
to kick off a major bullmarket phase.
Bearing in mind the super bullish COT, which we will come to shortly, it
is very interesting to observe on the 7-year chart that a strongly converging
and correspondingly bullish Falling Wedge may be completing in gold. If this
is so, then an upside breakout from this prospective Wedge should occur soon,
and if that happens gold is likely to enter a phase of rapid advance. The
intensifying disparity between the amount of physical gold supply available
and the avalanche of naked shorting of paper gold that has been used to
suppress the price until now has created the conditions where an upside
breakout from this Wedge could drive a massive spike. The pale red parallel
channel line below caters to a worst case scenario that we were earlier wary
of, but this has been rendered obsolete by the latest super bullish COTs.
There is always the chance that the COT structure will rapidly deteriorate as
the price of gold approaches the upper channel boundary, presaging a reversal
to the downside again, but this is considered unlikely, and we will cross
that bridge when we come to it.
Now to the latest COT, which as you can see makes plain why gold suddenly
came bursting through the gate on Friday. The Commercials have now unloaded
almost all of their shorts, and have not had such a low short position in
gold (virtually non-existent) since late 2001. This tells you all you need to
know - which is that we can expect a thumping great rally, even if the
bearmarket up to now re-asserts itself later, which it may not - this COT is
so bullish it may signal that gold's final low is in and it goes up from
here. This should not really come as a surprise considering that we are
headed in the direction of a major currency crisis, economic collapse and
war, which not even the likes of Apple, Facebook and Netflix will have the
power to deflect.
Click on chart to popup a larger clearer version.
On we go to consider the startling reversal in the dollar on Thursday on
its 3-month chart, which precipitated gold's breakout on Friday. Even though
we knew it was likely from gold's COTs a week ago and from the Rising Wedge
forming on the dollar chart, it was still of shocking magnitude, with the
dollar index dropping by 2.3% in just one day, a massive move for a major
currency. Ostensibly it was caused by the market's reaction to remarks by
Draghi, the head of the ECB, but gold's COTs a week ago showed that this move
was already "baked in" and Draghi was simply the catalyst or
excuse. The point is that a move of this magnitude following a lengthy period
of advance almost always signifies a major reversal. This drop may mark the
beginning of the end for the dollar.
The importance of this dramatic turnaround in the dollar is further
emphasized by where it occurred, which as we can see on the 18-month chart
for the dollar index, was right at resistance at the March highs and at
"round number" resistance at 100. What might be happening is that
the dollar is building out a Double Top. Certainly it would seem to be wise
to get out of dollar investments here and only consider getting back in if
the dollar index can succeed in breaking above 100.
Conclusion: gold broke out convincingly on Friday to start an
intermediate uptrend that will result in worthwhile gains from here for a
wide range of investments across the sector. While the bearmarket may
reassert itself later, latest gold COTs are so bullish that we may have seen
the final low - it may be over. We will know if it succeeds in breaking out
of the Falling Wedge shown on the 7-year chart.
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