Originally published August 28th, 2011
After becoming monstrously overbought, gold suffered a heavy smackdown early last week as predicted in last week's update. It plunged back into support at the neckline of a potential Head-and-Shoulders top that we had delineated and then bounced strongly - so strongly that it calls into question the validity of this pattern. This action is shown in detail on the 2-month chart below. If the H & S pattern is negated by the price continuing to advance towards the highs again it does not mean that gold is not marking out an intermediate top or at least a consolidation, however, as it could morph into some other pattern like a Rectangle.
The 6-month chart shows that gold is still heavily overbought on its MACD indicator despite the smackdown early last week, and relative to its 200-day moving average, which is trailing a long way beneath, and it went into reverse at the trendline target shown. While the current high volume and extreme volatility characterized by massive daily price swings could mark the start of a meltup, they are usually an indication of an over-excited market setting up for a correction.
You may be aware that there is talk in some quarters of gold having broken out into a greatly accelerated uptrend channel, but according to our interpretation of the charts it has not - at least not yet. On its 6-year chart we can see that gold arrived at the upper boundary of its broad uptrend channel in a phenomenally overbought state - it thus didn't take any rocket science to predict last week's abrupt reversal. It dropped hard and fast into support which triggered buying by latecomers who had had missed the earlier party, encouraged by the Fed's QE friendly talk late in the week, which normally leads to renewed decline. For gold to now enter a supersteep meltup uptrend it will need to break out to new highs and clear above the uptrend boundary shown on our chart, which is regarded as a low probability scenario here as it is so overbought. More normally we would expect to see it now react back or at least consolidate for some weeks to unwind its current extremely overbought condition, which is regarded as the more likely scenario that should it eventuate would present some excellent buying opportunities, as this bullmarket has a long. long way to run yet.
With regards to the US Federal Reserve and their asinine and vacuous, and increasingly irrelevant statements, we would make the following comments. The Fed have painted themselves into a corner with their actions and inactions of the past several years and are now impotent - their toolbox is now completely empty. They are left with only two stark choices - continue to ramp the money supply - do QE3 even if it is called something else - and hold interest rates near to zero - which will collapse the dollar and cause massive inflation, or "withhold the fix from the junkie" which will create a rapid economic implosion. We can therefore safely assume that they will elect to follow the line of least resistance which is the former. Here we should point out, however, that the markets are not going to stand for much more of this - if they continue along this route and collapse the dollar with the partial intention of defrauding Treasury holders and holders of other dollar denominated debt out of a sizeable percentage of the value of their holdings, they risk bursting the last great bubble supporting the US, the Treasury market, and interest rates will skyrocket. We are thus fast arriving at a profoundly dangerous juncture, and because the problems are so deep rooted and so intractable, involving gargantuan and unservicable debts and obligations, there is thought to be zero chance of avoiding a massive global economic train wreck, with the dust only settling when all these debts are declared null and avoid. The only question remaining is how long they can put it off - not much longer to judge from the look of the charts for the banking sector.
