Gold Market Update originally published May 8th, 2011

Gold’s reaction last week was quite modest, given what happened elsewhere, especially to silver, and with the benefit of hindsight it is quite clear that it was a good point for it to react as it had the Friday before risen to become critically overbought on its short-term oscillators.

On its 6-month chart we can see how, late the previous week, gold had risen to become critically overbought on its RSI, opening up a pretty large gap with its moving averages. It was thus a good time for it to react back and the severe reaction across the commodity sector last week, especially in silver, provided the perfect backdrop. As we can see this reaction was far less extreme than that which occurred in silver, and brought the price back in a fairly normal manner to support above its 50-day moving average. However, the four successive down days, which although more modest, mirror those in silver, are not viewed as normal and are not liked and are regarded as bearish in purport. Thus, while a rally back up looks likely soon, it is thought likely that it will be followed by renewed decline which will take the price below last week’s low.

Last week’s decline looks rather insignificant and is in fact barely visible on the 3-year chart, which underlines the point that gold has not been subject to the speculative ramp that silver has. While in one respect this is positive as it is a sign that gold has not become frothy, such a situation can precede a downturn as towards the end of an advancing phase in the Precious Metals the mob tend to pile into silver as they can’t afford to drive a spike in gold. As we can see there is plenty of upside potential to the upper channel return line shown, which would result in substantial gains from the current price, but we should also note the potential bearish Rising Wedge that could become operative if the Fed refuses to refill the QE punchbowl in a timely manner, in an effort to sluice funds from commodities and stocks into the dollar and Treasuries.

Conclusion: an immediate or almost immediate relief rally in gold is expected that is likely to be followed by a drop below last week’s lows, leading to a possible test of the trend channel lower boundary shown on the 3-year chart, which might fail if the Fed decides to pull the plug on the commodity markets, which it has an incentive to do. Even if it does gold is unlikely to fall as much as other commodities, and because we are deeper into the fiat endgame than was the case in 2008, it is unlikely to get hit as hard as it did then.

The dollar rally that we had expected and predicted over a week ago on the basis of the extremely negative public opinion on the dollar started with a big up day on Thursday, that was immediately followed on Friday by a breakout from the downtrend in force all this year. This rally could get as high as 79 on the index before it’s done despite all the gloom and doom talk, which would clearly be likely to coincide with further weakness in the Precious Metals. 

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