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In May 2006 Gold
reached a peak of $720. Since then it has been grinding
through a
consolidation. The consolidation has been very bullish because it has
yielded a series of
higher lows and higher highs. But this see-saw action has also
been extremely
traumatic for the average gold investor because each upleg
raised their hopes
of a new powerful rally only to see their hopes dashed by yet
another pullback
that has repeated four times over the last 12 months.
If we examine the
consolidation trend we can now see that the coming upleg is
likely to break this
monotonous see-sawing and will likely be a massive rally.
In figure 1 we can
see that the consolidation has been fairly well contained
between the blue
support and resistance lines. We can also see that the uplegs
have had a very
consistent slope taking about two months to rise from the bottom
support line to the
upper resistance, and this is depicted by the parallel red
dotted lines.
Despite optimism rising during each of the uplegs it was clear that
the ONLY way that
gold could hope to make a new high would be for it to blast
through the top of
this trend channel. This only transpired on the very first rally
marked “1” on the chart. When the top resistance line was encountered which
was far below the 25
year high of $720 what was the inducement for investors to
rush in? The answer
is “none”! And they didn’t! They just yawned.
But as we now await
the fifth upleg in this year long consolidation there is an
interesting
development. Extropolating from the gold price today with the average
slope of the
previous uplegs we can predict the upper resistance line will be
intercepted at gold
$730/oz. That is a very exciting revelation because WITHOUT
gold blasting
through the top of its trend channel it will make a new 25 year high.
Now what do you
think will happen when gold reaches the upper resistance line
and gold has just
exceeded its previous 25 year high? Do you think investors will
yawn, do you think
the hedge funds, and mutual funds will be disinterested?
Absolutely not! They
will have every incentive to rush in and buy and this will
provide the buying
power that will blast gold through its upper resistance. Once
720/oz of May 2006
is left in the dust, the bulls will have their sights firmly set on
the ALL TIME high of
$850. It is very unlikely that the point denoted by “5” will be
where traders sell
against the “overbought” position as they have in the last four
rallies. Those that
do will probably live to regret it.
This tantalizing
prospect looks like what the war weary gold investors have been
waiting for. It will
likely be VERY BIG.
Adrian Douglas
Marketforceanalys.com
Adrian Douglas writes many articles
on his observations and analysis on financial markets, gold and silver
markets, and some selected company stocks. The articles were all initially
published at www.lemetropolecafe.com.
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