Originally published December 23rd, 2010.
You can consider this Gold Market update to be gift wrapped. As I am unable to get presents to each and every reader this year for logistical reasons, these Gold and Silver Market updates are going to have to suffice, which is perfectly reasonable given how bullish they are.
Little has changed since the last updates were posted on the 5th December, but what change there has been has increased immediate upside potential in both gold and silver substantially, as the minor reaction in gold and sideways action in silver of recent weeks has served to further unwind the earlier overbought condition.
The interpretation of the pattern in gold presented in the last update, which was that it is marking out an upwardly skewed bullish "running correction" remains unchanged. All that has happened in the past few weeks is that it has reacted back across the upsloping channel to arrive at support near its rising 50-day moving average. As we can see on the 6-month chart this reaction has resulted in a further easing of the medium-term overbought condition as shown by the MACD indicator, which is now only slightly overbought. The noticable convergence of the short-term downtrend channel this month is an indication that gold will soon break out of it upside to resume its advance and mkae new highs.
While the convergence of the downtrend channel reaction of recent weeks in gold may not be very marked, the same can certainly not be said of the parallel reaction in the PM stock indices such as the HUI index shown below. On the 6-month chart for the HUI index we can a marked convergence of the downtrend channel reaction that has served to largely unwind the overbought condition and by bringing the price back down to support near its 50-day moving average and at its uptrend channel support line has set gold up for another impulse wave - an upleg that should easily take it to clear new highs.
The Wedge reaction of recent weeks can be seen more clearly and easily on the short-term 2-month chart shown below.
If gold and silver are set to rise in the near future, it follows that the dollar is probably, although not necessarily, set to drop. Our 6-month chart for the dollar shows that this is indeed the case, as the rally of recent days appears to be spluttering beneath the falling 200-day moving average, and with the dollar still overbought on most indicators there is certainly scope for renewed decline. In the absence of more unrest in Europe the QE campaign should work its magic and drive the dollar lower again, reducing the real debt burden of the US - provided that it falls far enough and fast enough of course.
Copper has now broken out to clear new highs as predicted in the last update and is in position to accelerate away to the upside.
While a substantial intermediate-term rally is in prospect we should be mindful of the storm clouds that are gathering on the horizon. The recent sharp rise in rates is a "shot across the bows". Rising interest rates are "the kiss of death" to the stockmarket, and if this trend continues it will crash the commodity and stockmarkets. With regards to the US stockmarkets "dumb money" is firmly in control of the ball, with virtually all technical indicators such as insider selling, Put/Call ratios, sentiment and VIX all flashing warnings. As you should never underestimate the collective power of fools, even if it is temporary, we have refrained from "crying wolf" about this for a long time - months - but they are now pushing the envelope to such an extreme that while the stockmarket may extend its deluded Santa Claus rally into early next year, we wouldn't give it beyond about the middle of January before a serious reversal occurs. So if we get the rally we are expecting over the next 2 or 3 weeks in the PM sector we will be making a careful note of the positions of the exits at the same time.