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Gold Market Update

Originally published October 23rd, 2011.

Technically the picture for gold now looks strongly bullish. Action played out last week exactly as predicted in the last update with gold breaking down from its Pennant pattern AND ABORTING THE BEARISH IMPLICATIONS OF THE PENNANT, by dropping back modestly instead of plunging. It arrived back in our target zone near $1600 on Thursday and then reversed quite sharply to the upside on Friday. While nothing is guaranteed in this business and there is still a reduced chance of its being a Pennant with an amended lower boundary, this action implies that a positive QE-rich resolution of sorts of the acute problems in Europe is imminent, despite the severe and intractable problems there.

Gold 4-Month Chart

If we do see a QE-rich "solution" to the problems in Europe shortly then we can expect both gold and silver to re-enter robust uptrends, and this is what the latest COTs are pointing to. The latest COTs for gold show that Commercial short positions dropped back further to a record low last week. This augurs well for a new uptrend.

Gold COT

In the light of the outlook for gold based on what we have observed above, the charts for the dollar are rather perplexing. On its year-to-date chart we can see that it appears to be in position to stage another strong upleg, or at least a bounce, as following a strong breakout move it has reacted back to a zone of support near to its rising 50-day moving average, following a normally bullish cross of its moving averages. However, the COTs for the dollar remain strongly bearish, and the COTs for the euro remain strongly bullish, as shown below, implying that despite the potential for renewed advance it is going to crash this support soon and head back towards the lower support shown, which fits with the bullish outlook for gold and silver at this time.

US Dollar Index

Euro FX COT

One final point - the times of greatest opportunity are usually masked by danger, and there is certainly great danger at this time of Europe failing and thus a lot of associated fear in the markets. Could things get even worse and tank the markets, possibly including gold and silver? - yes, of course they could and we looked at this blood curdling scenario last week, but whether or not this occurs one thing is clear - the normally right Commercials are banking on a resolution of this crisis and soon, and if things do get even worse it is safe to assume that their positions will become even more lopsided. We tend to assume that gold and silver will automatically drop in a market crash scenario, as in the past this has resulted in funds fleeing to the safety of the US dollar and Treasuries, but it could be that during the next such crash this will not happen, because the dollar and Treasuries may no longer be perceived as safe havens what with US banks failing all over the place, and if that were to be the case investors would be left with precious few options, and might look instead to the Precious Metals as a refuge, with the result that they either don't get dragged down much in the general melee or even advance.

 

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