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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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Another Chance for Gold to Shine

After a ho-hum week of trading last week, the price of gold closed the first week of March at $433.60 While slightly below last week's close, gold is back above its 20-week moving average and is about to meet up with a rising wave of supply that should be able to carry it back up toward the $445-$450 area before encountering strong resistance.

This is good news for gold bulls as it will allow gold another test of that pivotal high from earlier December before the 10-week correction began. This is coming at a time when many major commodities are experiencing parabolic-type blow-off moves to the upside as the winds of inflation are stirring once again after a brief hiatus.

The latest news headlines reveal much concern over the rising specter of inflation, including a feature-length article in a recent edition of Business Week entitled "Is that a whiff of inflation?" In a rather dark tone, the editors state in this article, "The forces that have held it back are starting to move in another direction."

Another recent article appearing in the London Financial Times asserts, "Inflation measure signals revival of price pressures." This article expounds at length the fact that the Federal Reserve's favorite measure of inflation has recently rekindled fears that price pressures may have intensified at the start of the year. Naturally, this is ex post facto (considering that the aforementioned "measure" is only viewing what occurred earlier in 2004).

But the re-emergence of inflation concern in the major news headlines is worth noting. This is especially true since most mainstream publications have gone out of their way to paint a rosy picture at the beginning of this year, complete with some of the most ebullient economic headlines since the late 1990s. Why the sudden about-face? This discussion will have to await another commentary. For now suffice it to say that the perception, if not a measure of reality, is that "inflation is back" right now. And for that we have only to turn to the primary barometer of inflation pressure, viz., the price of gold.

Now as you can see in the above daily chart of spot gold, the yellow metal is back above its 10-week, 20-week, and 30-week moving averages. The upward curve of the parabolic bowl structure in this chart reflects the increasing rate of change in momentum, which is what should give rise to the re-test of the $445-$450 area in the immediate-term.

A concern, however, is that the 10-week MA is still downward-tilting, which suggests that a battle with resistance lies ahead as gold moves above $440 and closer to the $445-$450 target area. Also of concern is the fact that gold's 10-week correction bottom at $410 was to the right-of-center of the mid-point, or "vertex," of the parabolic bowl. This again could mean that the parabola will "expire" once gold reaches the target area. We'll know more as the target is reached.

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