Technical Analysis of Gold

August 19, 2003

Gold metal looks good here as it has broken the down trend line of the Symmetrical Triangle. Gold might now find support on top of the broken down trend line. Even though the triangle appears to be broken, I would like to see Gold take out resistance at 368 to better confirm the breakout. I would view any pullback in Gold as temporary.

However, a rally in the US dollar could cause Gold to pullback inside the triangle, possibly all the way to the up trend line in the $350s, as will be explained in further detail later on.

The next resistance levels are denoted by the dotted lines as $368, $375, and about $390 respectively.

Below is a plot of the gold metal on a longer term basis. Basically you see the same technical picture as above, but on a muli-year expanded view. Here you can see two triangle formations, triangles are simply consolidation patterns before a large price movement.

On an ultra long term, gold is above a 15 year downtrend line. If the recent consolidation on gold is broken to the upside, gold has a shot at $425.

Gold stock Analysis

The HUI broke out of a "text book Ascending Triangle", with the breakpoint at 157.8 in July. This breakout level is significant for gold stocks, especially those in the HUI index. Anytime a multi year resistance level it is broken, an explosive price appreciation usually occurs, which we are currenlty enjoying. What's exciting is that a long term price target of the HUI is in the 200's based on height measurement of the triangle (75 + 158 = 228). The HUI could pullback at anytime to digest its gains, however I think any pullback will be temporary and I would use it to buy more gold stocks.

Unfortunately you cannot play the HUI directly like you can with the XAU, you can only play the stocks within the HUI, (components of the HUI)

The HUI is short term overbought and will probably pullback, however I think the pullback will stay above the strong support at $157.8

On a shorter term basis, you can see that the HUI has broken out of two Bullish Flags recently. The first flag took out the formidable $157.8 resistance level, while the recent one took it to new highs in the high $170's last week.

Gold stocks in the HUI may be getting a bit over extended in the short term and a pullback may occur at any time. On a pullback, the first support levels are 177.70 and 170.65, followed by support at the small flag in the 160s and finally the major support at 157.8. However, if the US dollar breaks out, then the HUI could pullback even further, but the major support at 157.8 should hold. I doubt the HUI will fall all the way back to major support at 157.8.

The 60 minute chart of the HUI gives us more detail:

If the HUI pulls back this week, the up trend line (noted in red) may act as support. However, if it is broken, then $174.70 and $170.65 would be the next support levels.

The XAU is also doing very well, and has rallied nicely since breaking out of the Symmetrical Triangle. Last week, as expected, the XAU found resistance at the 2002 high of 89.10 which is major resistance. The XAU may have some trouble breaking this resistance level, however, once it does, it will be off to the races.

Note that based on triangle height measurement, a rough price target for the XAU is about $110.

Below is a closer view of the XAU index. On a pullback, $85 might act as support.

Gold mutual funds have also been breaking out, GOLDX below is an example, notice the Ascending Triangle that was broken to the upside. A generic price target for GOLDX is about $18.25. This is calculated by adding the height of the triangle to the broken resistance level, i.e. $13.25 + $5 = $18.25

US dollar Analysis

Last week I wrote that the US Dollar was forming a Bearish Flag, however after re examining the chart, I now think that the US Dollar has formed a bullish Ascending Triangle with resistance at 97.6. The dollar looks bullish here, and is a nice up trend. If the dollar breaks resistance at 97.6, then the dollar could rally to the next resistance levels at 98.70 and 102.15 respectively. Such a breakout would probably cause Gold metal and gold stocks to pullback - possibly quite hard. If the up trend line is broken to the downside, then this bullish pattern on the dollar is negated.

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