first majestic silver

Gold Gaps

March 25, 2005

The extraordinary nature of the weekly chart below (source: Decisionpoint.com) is the number of gaps that appear thereon

What is a gap?

A bar chart reflects the high/low/close for any particular period - in this case weekly.

A gap occurs when the opening price for the current period is either higher or lower than the closing price for the preceding period, and the price does not retrace sufficiently during the current period to close the gap.

What is the significance of a gap?

Clearly, if buyers generally wake up in the morning being prepared to pay (say) a higher price than yesterday's close, it is reasonable to conclude that the decision is motivated more by emotion than logic.

In the chart above there are no fewer than 13 gaps that occurred at he beginning of a week over a period of 4 years, and its fair to say that the environment has been emotionally charged during that period with an extraordinary bias towards "speculation".

Another interesting observation is that, with the exception of the most recent gap, all 12 of the previous gaps were subsequently covered when the market eventually came to its senses.

From this we can conclude that it is a virtual certainty that the gold price will rise to at least $440 to ensure that the latest gap is covered.

But, if the gold price does rise to this level, the buy signal that was given on the following Point & Figure Chart will remain effectively in force - as will (at least) the horizontal count target of around $500 (chart courtesy stockcharts.com)

But this logic is not consistent with the argument that the movement of the US Dollar and the dollar Gold price are mirror images of each other. Will a rising gold price imply a falling US Dollar?

Well, lets have a look at the US Dollar chart:

There are two important observations that flow from this chart:

  • There is a "non confirmation" of the falling bottoms in the price chart and the rising bottoms in the PMO oscillator. Such a non confirmation is often (not always) a sign of an impending trend change.
  • The high/low bar this week is peeking up through the falling trendline.

How is it possible that gold could rise to $440 (and maybe even to $500) AND the US Dollar can rise to enter a new up trend? Will this break the previous inverse nexus?

Believe it or not, this analyst is more numbers driven than picture driven. Numbers are precise (maybe precisely wrong, but nevertheless precise) whereas charting has more to do with tracking human behaviour which, by definition is imprecise.

Having said this, "the market" ultimately decides price even if logic dictates that that price is not defensible, and it for this reason that this analyst pays particular attention to the interplay of market forces. Logically, the US Dollar is currently the world's currency and, logically, gold is the ultimate fall back currency.

Yep. That's what logic would conclude. But the charts are telling me - and have been telling me for some months - that this relationship may soon change.

The following chart of the gold price multiplied by the US Dollar seeks to determine which of the US Dollar and Gold is supreme at any point in time.

There is no question that:

  • The Goldollar Index has been in a rising trend since 2000/01
  • There is a resistance at 3750 which, if penetrated on the upside, will give rise to a whole new ballgame.

Will this level be penetrated on the upside?

Your guess is a good as mine, but there are a couple of technical arguments that can be put forward that will support such a conclusion.

The bottom line is that the market will move when it is good and ready, and patience is the order of the day.


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