Gold Market Update Originally Published October 17th, 2011

News has come in that “Germany and France are spearheading a multi-trillion dollar “shock and awe” programme expected to be agreed next weekend and presented the following week at the G20 summit in Cannes. The international community may provide further support after the G20 agreed that the IMF should “consider new ways to provide on a case by case basis short-term liquidity to countries facing systemic shocks”. The IMF will report back on what measures it would offer at the summit in Cannes.” This should be music to the ears of gold and silver bulls and is of course exactly the sort of “solution” we have been expecting – and since we have aligned ourselves with the Commercials, exactly the sort of solution they have evidently been expecting. The solution involves a massive blast of QE which will be highly inflationary and thus will drive gold and silver and other commodities higher. European leaders appear to have at last learnt this universal solution to all problems large and small from the US, and although it doesn’t really solve the problems at all and in fact makes them ultimately worse, at least “it kicks the can down the road” and keeps leaders in power for a while longer.

Over the past week gold has advanced slowly towards a clear resistance level in the $1680 – $1710 zone. This is a very important resistance zone as it marks the lower boundary of the earlier top area, so it will be a big deal if gold can climb back above this level. You will recall that in last weekend’s update we had classed the current holding pattern as a potential bear Pennant, but now, even though gold may back off short-term, the action of recent weeks is viewed as a basing pattern that should lead to renewed advance before much longer. Because of the strength of this resistance level and the fact that gold has got back up to it quite quickly we should not be surprised to see gold turn tail and drop short-term, perhaps back to the support in the $1600 area, which is also suggested by the weak volume on the rally this past week which indicates that gold is not yet ready to take out the resistance. We should not be upset by this and instead use it as an opportunity to build positions further, as it is now thought unlikely that gold will drop below $1600 after which it is likely to turn higher and drive through the aforementioned resistance. It is now thought highly unlikely that gold will drop to the “aggressive accumulation zone” shown on our chart. In addition to the powerfully bullish fundamental factors set out above, the gold COT charts remain strongly bullish, and are little changed from last week.

The latest copper COT charts also provide circumstantial evidence of an impending big rally in commodities, with the habitually wrong Large and Small Specs going short copper while the Commercials are now quite heavily long. The Large Specs got slaughtered after their July euphoria when copper challenged its highs.

The dollar has reacted back sharply over the past 2 weeks, probably due to the prospect of resolution of the acute crisis in Europe. It is now oversold short-term and on support near its rising 50-day moving average, and is therefore entitled to a bounce. However, if we see some real progress in Europe and easing of the crisis there in coming weeks, then all of the gains made during the recent rally could be given back – and the rest, as the dollar has only benefitted in the recent past by default – due to its status as “King of Hell”.

In conclusion gold looks set to break down short-term and drop as the dollar stages a recovery rally, but the expected drop should be nowhere near as severe as the September plunge, and it will provide a final opportunity to load up with gold and Precious Metal investments generally ahead of the major rally that the COTs are presaging. 

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