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Precious Points: Wave 1 Done?

From a technical standpoint, gold still has room to run, at least up to the November high and probably beyond. Whereas the technical picture in the white metal had been pointing lower, the recent performance in tandem with gold now supports a more optimistic outlook. Gold has a decidedly bullish look about it, but it will take clearing $855 before some will finally put to rest any lingering suspicions of a deeper correction. An impulse in gold beyond that level would probably be matched with silver moving through $15.50 if not $16. Gold can be expected to reach record highs, but the fate of the housing market, the economy at large, and other exogenous factors may still determine the extent of that move. If last week's signal was the triangle in gold, then this week's might be silver at $15. ~ Precious Points: Super Breakout! December 29, 2007

The outlook was indeed positive after the breakout of the triangle two weeks ago, and gold wasted no time taking out the November highs, shooting through $855 and disappointing those looking for a sharp correction in precious metals. Silver also made good on last week's promises, trading briefly over $15.50 before closing just below that level.

But it wasn't all up-ticks in gold and silver, especially on Friday, where the action underscores some of the cautious notes sounded here in recent weeks. On a day when economic weakness panicked stock markets and raised rate cut expectations, metals traded lower initially, before retracing most of the decline. The weakness in the face of otherwise bullish catalysts may suggest the end of the impulse out of the triangle, which can now be counted as five up, and the start of a new consolidation. At the same time, the reaction likely points to the powerful move in metals still around the corner.

The daily chart in gold below shows the breakout and the stall at about $870. If we are counting the impulse out of the triangle as 1 of 5, then a second wave retracement is likely to have begun off last week's high. Though, technically, this could drop as deep as $800, the previous high at $850 and the 5-week sma at about $825 represent more likely targets.

The use of the 5-day simple moving average in silver is obvious in the chart below, and this level will continue to be the first support level for any correction in the white metal. Breaking through and holding last week's highs will be the first objective of any bullish activity.

Precious metals, but gold in particular, have benefited recently from a confluence of factors. In addition to worry about the economy, there's been steadily lower interest rates, a declining dollar, geopolitical turmoil and high crude oil prices. With the release of Fed minutes that used stark language to keep the door open to future rate cuts and a weaker than expected jobs report that made those cuts all the more likely, fundamentals continue to unfold in favor of the precious metals. Expectations are already going through the roof, but if this trend continues, a perfect storm may take gold and silver beyond traders' wildest dreams. Consider that oil is trading at all-time inflation adjusted highs, whereas gold's inflation adjusted record is above $2000 per ounce!

Obviously the fundamentals in gold and oil are a bit different, but that we've seen any weakness in metals at all lately might simply be the technicals asserting themselves, flattening out the ascent a bit before another run. If positive retail data can alleviate economic concerns and quell some of the panic of last week, we may see gold and silver settle into a range for a few weeks.

A surprise rate cut early next week would probably extend the current rally, but that remains a very low probability event with the Fed's expanding of its auction funds, announced Friday, probably the extent of the accommodation we'll see before the next meeting. And, with the markets hopes pinned squarely on the Fed, any perception of the Fed's stinginess might play into a consolidation period for metals and could also start a rally in the dollar that has so far not appeared at the top of the year as some expected. Until the extent of the consolidation in metals is understood, caution should be exercised, though it's likely those expecting a catastrophic decline, even to the 50-week sma, before another explosive new rally, will continue being disappointed.


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