Gold Price Pull Back?
Brian BloomThe chart below is very important. It shows the $CRB having experienced a "false" breakout from a bearish rising wedge, with the price now firmly back inside the wedge.
The probabilities are therefore quite high that the $CRB will soon break DOWN from the wedge. (Chart courtesy DecisionPoint.com).
In terms of classic theory, the $CRB "should" thereafter, pull all the way back to around 237, and maybe as low as 235
The probability of a breakdown from the wedge is further enhanced by the (tentative) sell signal being given by the PMO.
A pull back in the Gold price could be anticipated because, for the moment, Gold is behaving more like a commodity than a currency. Yes, we can argue all we like about what "should" be. Yes, Gold "should" be a currency. But the fact is that, until the Gold price starts to outperform the $CRB, "The Market" still perceives it to be more a commodity than a currency.
Of course, it could be argued that if the $CRB pulls back, and the Gold Price either holds firm or rises, this would be evidence that Gold is starting to emerge as a Currency.
Well, let's look at that:
The reader's attention is drawn to the PMO oscillator, which has shown a series of descending tops since June 2003 - even as the Gold Price itself has been rising since then. This non-confirmation does not support an argument for the Gold Price to rise much further from this point in the short term.
"Aaagh" you could argue, "You're just twisting the facts to suit your argument. It could just as easily be argued that because the PMO is not yet in overbought territory, there is a HIGH probability that the Gold price could rise in the short term"
OK. Let's explore that argument in the context of the Relative Strength charts.
First, if we look at the Point and Figure Chart of the Gold Price itself, a "Price Objective" of $404 is called for (Using a different technique, I have a slightly different price objective of $408) (Chart courtesy of StockCharts.com)
A Price Objective of $404-$408 is not a particularly robust move from this level and, if such a target were to be reached it would (objectively) represent a point from which the gold price might then pull back to consolidate.
The following chart - which is relative Strength chart of Gold vs $CRB is very informative:
What it is showing is that the Gold Price (relative to the $CRB) is sitting right at a key point of resistance to further upward movement.
Can I envisage a situation where it could break UP?
Sure I could:
If the $CRB does pull back to 237, and the Gold Price does rise to $408, then the ratio will likely break upwards - and show a "buy" signal for Gold. Of interest, is that under such a scenario, the measured move target (using a horizontal count technique) would be around the 1888 level which, in turn, would bring gold back into line with the $CRB Index level of the early 1990s.
If the Gold price subsequently continued to rise FURTHER relative to the $CRB, THEN it could be argued that Gold is STARTING to behave more like a currency than a commodity.
So the $64,000 question is: Will the RS chart break up?
For an answer to this question, let's turn to the RS chart of $HUI (unhedged gold companies) relative to $CRB
This chart is CLEARLY showing that The Market is at a "final" decision point. (I have had to show this chart with a 3 box 15% reversal to eliminate the "noise" from the high volatility of the $HUI). If the $HUI breaks up from this point, then a "new era" can be anticipated - ie once the $HUI breaks up through its final resistance level, it can be argued that The Market's attitude towards Gold will place a higher emphasis on Gold as Currency than on Gold as Commodity.
Unfortunately, this chart does not tell us whether $HUI is more likely to break up from these levels or pull back from these levels in the short term.
The $HUI is in a Bull Trend relative to Commodities in general, and this seems to be pointing to a coming change in Investor Sentiment towards Gold as a currency. But there is no clear evidence yet regarding a balance of probabilities of whether - in the short term - gold is likely to break up from here, or pull back from here. The indicators are conflicting .
Notwithstanding the above conclusion, there is another critically important conclusion that can be drawn from the last chart which is this: The measured move target for the $HUI/$CRB ratio calls for a final destination which REQUIRES a break up of the $HUI to new territory.
If you're a gold bug, this is the "final evidence" that you have been reading the market correctly.
But patience is still called for.
Australia, November 22nd 2003
In the late 1980s, Brian Bloom became an Assistant Vice President and, later a Vice President of one of the world's largest Venture Capital Investment Banks. In that capacity he worked on more than one multi-billion dollar Leveraged Buyout transaction. Since the early 1990s he has been providing strategic, marketing, capital raising and management advice to emerging businesses with multinational growth potential and, since 1998 has been focussing specifically on Franchising in the Fast Food and Indulgence Industries. For over 25 years he has been motivated by wanting to "do something practical" about the parlous state of economic affairs we now find ourselves facing - the evolution of which he has been watching with fascination since the late 1970s.
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