Fear is receding…Gold needs to stay above $465

December 2, 2005

The level of intensity of my recent spate of communications has heightened because I saw the markets reaching for a point of structural decision; and I tend to pay much more attention when that happens. It seems to me that the markets have now taken the necessary structural decision: "Fear" is receding.

This will therefore be my last gold oriented communication for a while. There are too many other matters competing for attention.

In the centre chart below (of gold - courtesy Decisionpoint.com) if you draw a trendline joining gold's peak price in mid 1993 to its peak price in early 1996, and you extend that trendline both back and forward, you get 6 points of intersection - with one at a point of downside gap breakdown in 1990. My own experience is that when trendlines of this nature intersect with a historical gap level (without the chartist consciously trying to achieve such an outcome) it is advisable to sit up and take notice. This line is therefore particularly significant, and shows "support" for gold at $465/ounce.

If this support holds, gold has a chance of remaining within the current angle of incline channel. If not, the probabilities favour gold entering a new - and shallower - angle of incline channel.

Looking at the "set" of three charts holistically, the following observations are of interest:

  • The Goldollar Index is now hitting resistance of a congestion area established between 1985 and 1988
  • The Gold price itself is hitting the resistance of its previous 1988 peak (Needs to break by at least 2-3% for the break to be "real")
  • US Dollar Index has some limited upside (possibly as high as 100), but now has strong support at 90 - ie Downside potential in short to medium term is very limited
  • Break up of gold - and goldollar index - from this level will imply an entirely new game - as all previous areas of resistance are overcome.
  • It seems that such an outcome would need to defy logic associated with technical analysis. The Goldollar index line is too "perpendicular" and needs to pull back.
  • With US Dollar support at 90, implication is that either gold enters new era (gold "explodes" upwards) or pulls back sharply.
  • If it pulls back to any level above $465, new Bull Market Leg characteristics may be feasible in foreseeable future. Below $465 and the steam will go out for a while.
  • The ultimate support for gold is at the "key" level of its rising trendline - which is $450.

One of two outcomes seems possible. Either:

  1. $465 will hold and the current angle of incline will remain intact
  2. $465 is penetrated on the downside, but the $450 level holds - implying that a new an shallower angle of incline will manifest. 

Looking at the "landscape" of charts across all markets - bond, equities, commodities - it seems reasonable to conclude that "fear" is receding. Oil, commodities and bond yields all have some technical upside which is limited by previous resistance levels, and "bullish" rising wedge of S&P (see chart below) is indicating to me that we might be facing a honeymoon period of at least a year or so. (I have discovered in past ten years that there are some specific circumstances where a rising wedge is in fact strongly bullish - i.e. The textbooks need to be re-written in this particular area).

Could the gold price break up in the short term and enter an explosive upward phase of price movements? Of course, if the underlying "cause" of the S&P's rise is inflation. To me, such an answer is too simplistic and we should be cautious about "reaching" for the easy (and/or emotionally comfortable) answer.

The reality is that if inflation was about to break out in an explosive fashion, then bond yields would also be breaking up - in order to ensure a positive "real" return on loan funding.

The reality is that the yield curve is flat - indicating that the markets are not anticipating "exploding" inflation, and this conclusion is further reinforced by the apparent resistance to further rises in the 30 year yield as is evidenced by the following chart - with 5% to 5.5% appearing to be the upside level (possibly 6% at a pinch):

It follows that any small rises in short term yields (which might be mirrored by small rises in long term yields so as to avoid a negative yield curve) will be for the purposes of "managing" the economy.

Why the emphasis on the word small?

Note the falling tops of the PMO oscillator since November 2004 as compared with rising yields over that same period. This fall in the rate of yield increase is indicating a market that is benign and that is heading for relatively smooth sailing in the foreseeable future.

Conclusion

With fear receding, "good news" should prevail for a while. Whilst inflation seems a "theoretically" logical upside driver of gold, commodities and even equities, the yield charts are negating such a simplistic answer.

Bottom line seems to be that we may be entering a benign honeymoon period in the markets for some time into the foreseeable future.

Yes, this conclusion seems to fly in the face of underlying fundamental logic - but if the markets are saying one thing, and my logic is telling me something else, then it's probable that the market is right and the appropriate logic will manifest later

Gold is the official state mineral of Alaska.

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