Important developments

Clive Maund
Aug 12, 2005

Gold
Gold investors cannot complain that they have been short of advice in recent weeks, with an abundance of writers helpfully predicting that gold would either go up, down or sideways. Happily we were in the bullish camp, as we did not buy the apparent failure of the long-term uptrend in gold, and expected a breakdown in the dollar which we have certainly seen, and in recent days have expected an imminent upside breakout by gold, due also to the strong breakout by gold stocks which often precedes a breakout by the metal, and the expected breakout by gold occurred today.

We will now quickly look through the charts to gain a visual summary of recent developments and the consequent outlook, starting with a 1-year chart for gold.

The 1-year gold chart shows the triangular holding pattern that gold had stuck in since early December, and today's breakout above the top line of the triangle. Today's close above the June high is a positive sign, and it will be more positive still if the price can succeed in closing above the March high at about $447.

The longer-term 5-year chart shows the break of the long-term uptrend that led many to expect a serious reaction in gold. However, this break did not exceed the 3% margin within which the uptrend cannot safely be assumed to have failed. Frequently, a marginal breakdown such as this occurs, and then the uptrend resumes, and the lower trendline must then be adjusted to pass beneath the latest low. Another important reason for believing that a resumption of the advance was to be expected was the fact that the triangular pattern from last December was sat on an important support level.

Turning now to the charts for the dollar, starting with the 5-year chart, which should be compared to the 5-year chart for gold, we can see that the dollar has certainly broken out upside from its long-term downtrend. The strong advance during May and June ended up being firmly capped by the heavy resistance at and above 90. The important open question now is whether the dollar will eventually succeed in breaking above 90 and continuing on to higher levels, or whether it will enter a large trading range beneath this level. The positive action in gold, and especially in gold stocks in recent days, suggests that the latter scenario is more likely to prevail - the development of a large trading range beneath 90. The strength of the current reaction in the dollar also points to this outcome. The steep decline in the dollar so far this month can be seen in more detail on the 6-month chart. This decline broke the intermediate uptrend line shown on this chart, triggering today's plunge. The failure of the intermediate uptrend points to continued decline in the weeks ahead, perhaps right back to the March low, which would certainly be sufficient to trigger a significant intermediate uptrend in the precious metals.

The last point to note on the 6-month dollar chart is that it is becoming quite deeply oversold on a short-term basis, thus it is reasonable to expect a bounce before too much longer. When this happens we are likely to see gold react, probably back to the top line of the triangle, which would be a favourable entry point.

An examination of the COT charts is now normally included in the Gold Market update, which is the reason it is normally prepared at the weekend. However, today's important developments make an update desirable as soon as possible. The latest COT charts appear on Friday, and so a review of the COTs will be appended to the Gold Market update over the weekend.

In the last Gold Market update a warning was given of a probable reaction in the dollar, the following chart was included at the time...

Silver
We are believed to be on the verge of a substantial advance in silver. This is because gold and gold stocks have broken higher, the dollar has broken down from its intermediate uptrend, and a bullish "hammer candlestick" appeared on the silver chart as it probed support on Tuesday.

It is no coincidence that both gold and silver staged marginal breakdowns from their long-term up trends, and both have held key underlying support, which in the case of silver is at about $6.80.

On the 2-year silver chart we can see the marginal breakdown from the very large symmetrical triangle pattern that developed following the April 04 peak at an overbought extreme. Following this break the price has drifted sideways in a narrow range above the important support.

Many silver investors are probably somewhat dismayed right now that while gold and gold stocks have broken higher, silver appears to be languishing, but as we will shortly see, it has already signalled that it is going higher very soon.

On the 6-month chart we can see that on Tuesday the price dropped quite steeply intraday to probe support towards $6.80, but then bounced strongly to close very near to the day's high, forming a very bullish hammer candlestick. Even during ordinary times, this action would at the least signal an end to the downtrend immediately preceding it, but in the current situation with gold and gold stocks having broken strongly higher, and the dollar having broken down, this is believed to be the start of a very significant uptrend that is expected to break the price well clear of the large consolidation pattern of the past 16 months, and a substantial move is certainly due, as silver has been in a remarkably narrow range for months now.

A review of the COTs will be appended to the Silver Market update over the weekend.

Aug 11, 2005
Clive Maund
email: support@clivemaund.com
website: www.clivemaund.com

Charts courtesy of StockCharts.com.

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