Posted at 8.20 am EDT on 6th October 09. Gold at $1028.60 at timeof posting - just below the breakout point.
The impending gold breakout has been so long in the making that it has engendered a "we'll believe it when we see it" mentality amongst most market participants. What this means of course is that most will miss out on the big easy gains that will accrue during the dynamic phase of the next major uptrend and will turn up late at the party, as usual. We ourselves have had lingering doubts engendered in large part by the perceived risk of a dollar rally, but these doubts are now dissipating for reasons that will be set below.
When you follow something on a day-to-day basis, or even an hour to hour basis, it is easy to slip into a situation where you "don't see the wood for the trees" and the best way to combat this natural tendency is to zoom out and look at long-term weekly or even monthly charts. So that is what we will do now.
On the 5-year weekly chart for gold we can see that everything is now in place for a MAJOR RALLY in gold to commence. It has managed to hold the high ground for weeks following its upside breakout from a Triangle, and is repeatedly pushing at the resistance approaching its highs. Yesterday's action was strongly bullish. With all moving averages in bullish alignment, THIS RESISTANCE IS ABOUT TO FALL.
Two lingering doubts that have beset us in recent weeks, and presumably not just us, have been the possibility of a sizeable snapback rally in the dollar, and the high Commercial short position and Large Spec long position. With regard to the former, we have already deduced that there is now no scope for a sizable dollar rally. This is because the US government and Fed have backed themselves into a corner where they only have one option, which is to print (money) - thus the much greater risk is of a dollar collapse going forward. The world is much more aware of this US predicament than at the time of the big dollar rally last year. With regard to the COT figures this is now thought to be a "red herring" which is putting a lot of traders off gold right at the time when it is due to explode upwards. This is because we are in an extraordinary situation and we now expect the Commercial short positions and Large Spec long positions and open interest to continue to expand rapidly and dwarf previous measurements as gold ascends rapidly, as happened in 2001 - 2002.
The key point to grasp here is that this rally is going to be BIG. The major consolidation in gold has been going on for about 19 months now, so gold has built up a tremendous amount of energy for its next move. This is the 5th attempt to break above the March 2008 high, the other 4 attempts, after March 2008 itself, occurring in July 2008, February and May of this year, and the attempt now in progress. Thus it should be quite clear that once gold breaks clear above the MAJOR RESISTANCE at this level, it is not going to settle for some pitiful $50 - $100 gain - it is going up at least $300 and very possibly of the order of $500 - $600 and this gain should be achieved in short order over the space of three to six months or so. Silver will go wild when this happens.
Before we close it is worth taking a look at gold in another major world currency, especially with the dollar set to disappear down the gurgler. So we will now examine a parallel 5-year weekly chart for gold in Euros, which is very similar to its chart in Swiss Francs. This chart is clearly strongly bullish with a major uptrend remaining in force. After a breakout and strong rally early in the year, gold reacted back on its Euro chart to the important support level shown in the vicinity of its rising 200-day moving average where it has stabilized and started to turn up in readiness for the next run. With its moving averages in bullish alignment and its MACD indicator having turned up and broken above its moving average, it is ready for this next run, which will be signalled by a breakout above 7.04, the importance of the resistance at this level being more clearly visible on shorter term charts. The position of the MACD near to neutrality provides plenty of leeway for a major rally.
To conclude, gold is in position to embark on a major uptrend here that is expected to result in it tacking on a 30% - 60% gain in the space of about 6 months. Silver should make spectacular gains during the same period and PM stocks, after finally overcoming resistance approaching their highs, should ascend upwards in an accelerating arc. TRY TO MAKE SURE THAT YOU DON'T MISS THIS.