Gold Market Update

We've been here before haven't we? Gold has been in a rising trend for some considerable time, taking it to trendline or resistance targets, and then "wham!" it gets whacked back down again. Certainly the long-term outlook for gold is excellent, especially given the strong and increasing demand for physical, but over the short to medium-term it now looks set to get taken down again.

On the 1-year chart we can see that after a very good run which saw it recover some $200 from its October lows gold has arrived at downtrend channel line resistance, having pushed through a still falling 200-day moving average, which remains a bearish influence. Several factors point to a reaction here, which could be quite heavy. One is that the price has advanced way above the 50-day moving average and although this average has turned up, which is in itself bullish and bodes well over a longer timeframe, it is still way below the falling 200-day, signifying that gold probably needs more time before it can launch a fresh assault on the $1000 barrier. Another development increasing the chances of a reaction is the fact that the advance has been losing vigor, so that a bearish Rising Wedge has appeared on the chart, which is thought likely to result in a breakdown soon. Finally gold is considerably overbought, as is plain from the MACD indicator at the bottom of the chart.

If gold is set to drop then it implies that dollar is about to recover further. The dollar is still thought to have peaked, having broken down from a Head-and-Shoulders top area that formed from mid-October through early December. There is, however, room for a near-term recovery rally back up to the 84 area, and it may even make it to 85, which would of course provide the perfect background for a gold reaction. Pullbacks to the "neckline" are very common after a breakdown from a Head-and-Shoulders top area.

The latest gold COT chart shows that Commercial short positions and Large Spec long positions have continued to climb to levels that are increasing the probability of an imminent reaction.

So thanks, but no thanks, we are content to let others run the risk of finding out whether gold can continue still higher over the short to medium-term. Conservative and big money traders will be booking at least some of the large profits garnered over the past couple of months, and we are content to do the same here. If gold and Precious Metal stocks now react back as expected we will increase positions again for the next upleg.

Although silver does not look as vulnerable to a reaction as gold on the charts, it will likely drop in sympathy should gold go into reverse near-term as expected. On the 1-year chart we can see that overall silver still looks good, with it having broken decisively out of the downtrend of the latter half of last year and also clear above its 50-day moving average, which has now turned up, with the MACD indicator trending upwards too. These positive developments have created the conditions for a new uptrend to get underway. However, it may still be in a basing phase, which means it could react back probably to the $10 area short-term but possibly as low as $9 - $9.50, any such reaction being viewed as a buying opportunity as the long-term outlook for both gold and silver remains excellent. Traders may wish to scale back positions now in anticipation of a short-term reaction, and those shorting silver, which is regarded as hazardous here, can place a protective overhead stop above the December high at about $11.60.

The COT chart for silver is similar to that for gold, although gold's COT looks somewhat more bearish.

Clive Maund, Diploma Technical Analysis
[email protected]
www.clivemaund.com

Copiapo, Chile, 4 January 2009