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Gold Market Update

Gold fell heavily today, and although it was a large one-day drop, it was not unreasonable given the size of the decline in silver and the rally in the dollar. Although gold was certainly overbought and pushing its normal overbought limits it had not become as severely extended as silver had.

On the 6-month chart gold's recent strong rise looks modest compared to what we have recently seen in silver. The rally towards the end of March and this month had opened up a large gap with its moving averages, and it had risen to push normal overbought limits in recent days, as can be seen from the RSI and MACD indicators at the top and bottom of the chart. Even though it is now reacting, this retreat is viewed as a healthy technical development that will serve to partially unwind the overbought condition, and thus create further upside potential. A positive effect of the strong rally of recent weeks is that it has taken the price sufficiently far above the trading range beneath $575, for this zone to provide strong support in the event of the price reacting back that far, which is considered unlikely at this point.

On the 5-year chart we can see that gold has now moved into a higher gear, so that the long-term trend channel it had remained in for several years is now obsolete. Due to the outlook for the dollar, which we will come to shortly, the steeper rate of advance is expected to continue. A period of consolidation is now likely in the $600 area before progress resumes.

On the 1-year dollar chart we can see that the Precious Metals' about face today synchronized with a dollar rally from important support in the 88 area on the index. The dollar was short-term oversold so it was entitled to a brief rally, however, the outlook for the dollar is grim indeed. On this 1-year chart we can see that the dollar has been rounding over for about 9 months beneath a zone of heavy resistance, forming a large Head-and-Shoulders top which it looks set to break down from soon - and with the gap move below the "neckline" of this pattern about a week ago, it can already be said to have done so. Gold is expected to resume its advance once the limited support at the 88 level fails, with the next support being at the 86 level.

On the 5-year dollar chart we can see the importance of the resistance level in the 90.5 - 92.5 area that brought last years' rally to a dead stop and that once the 86 level fails, the next major support comes in the 80 area, and when that gives way, the dollar could go into freefall. The impending serious decline in the dollar presaged by these charts will obviously fuel the ongoing bull market in the Precious Metals and in anything else priced in dollars.

 

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