Only a few short days ago the prevailing consensus among gold investors was that gold is in a correction that had some way to go to work off the seemingly overblown $540 level it reached in December. Gold could have retreated all the way down to its lower trend channel line to around $450 - $460 followed by a considerable consolidation without violating the bullish case. While this is what would have to be expected if gold were still to trade within its stage one dynamics, the recent fireworks in the precious metals sector, however, suggest otherwise.
It appears to make sense to assume that gold broke out of an already ascending trend channel and may now be looking to establish new support at or above the old resistance line. In the 1-year chart gold broke out of its consolidation pattern in the early days of September. Since then it has been forming a new uptrend channel that itself was broken to the upside rather quickly.
Although at this point it may be too soon to know it seems that gold is making an attempt at a parabolic rise. This may imply that a pullback could come to a halt just above the $500 level, turning a former resistance line into new support. The astonishing thing is the short time frame in which all this is happening. All the recent action in the precious metals sector indicates a change in trading dynamics. This is no longer gold's stage one trading pattern. An acceleration of the uptrend is a technical factor to be expected at the beginning of stage two.
For gold to enter stage two of its bull market a few fundamental factors have to fall in line. So far the gold bull was often referred to as a phenomenon of the dollar bear. This is no longer the case. In the last months gold broke out worldwide to the upside in every major currency. The level most closely watched by global investors probably was the 350 Euro level which posed a strong resistance for years. The break of €350 may very well have been the event that spawned international investment demand for gold. Consequently, gold broke free from its inverse relation to the US dollar.
There are other important factors that distinguish gold's recent price action from its former trading dynamics. In the last years there was always a certain level of price support by physical demand from Asia that sort of put a floor under the more speculative trading in New York's market. However, this new gold behavior is now being driven predominantly by the Eastern markets which means that the demand for physical gold became much stronger. This physical demand has even spilled over to the COMEX where an increasing number of gold investors now demand delivery.
These are certainly events that we have not seen during the first stage of gold's bull market. It seems like investors are quickly recognizing the importance of a safe haven investment like gold. A similar case, of course, could be made for silver. After a long consolidation silver's technicals also seem to catch up with its bullish fundamentals at last.
After tuesday's trading gold seems to be approaching overbought levels short term. Similarly, some of the important HUI components like Newmont Mining, Agnico Eagles Mines, or Glamis Gold, to name a few, also seem to be at or in overbought territory so that a healthy pullback is to be expected. On the other hand, what does "overbought" mean these days?
For the time being I guess it is safe to say that gold is now trading within the next stage of its bull market. However, it should not be forgotten that $ 500 gold marks a resistance level that goes back to 1988 and 1983. So far it was taken out easily. Should the expected pullback indeed be stopped at the new support line of around $500 - $505, I, for one, would take this as a technical confirmation that gold has firmly arrived in the investment driven stage two of its bull market.