   |
|||
Is the Gold Uptrend Preparing to Extend?Erik McCurdy Editor's note: The Gold Currency Index (GCI) was created by Prometheus Market Insight in order to track the true, intrinsic value of gold as an international currency itself. This tracking index is a composite of gold prices in the currencies of 10 of the largest economies in the world as defined by GDP. After gold topped in May of 2006 it spent the next 16 months consolidating, ultimately forming a bullish cup-and-handle chart pattern. As expected, the subsequent breakout in September of last year was followed by a very strong uptrend that continues today:  The current uptrend consolidated in November and December via a pennant formation before moving up to current levels where price action has hesitated over the past three weeks. When a powerful uptrend slows in this manner it is either preparing to top or consolidating recent gains and preparing to extend. But which is it? Of course, no one can say for sure, but the charts can tell us which scenario is more probable, enabling us to plan accordingly and manage risk. In order to evaluate the current likelihood of each scenario, let's take a closer look at price action on the daily chart:  After the sharp move higher from the pennant formation breakout in December, price action has oscillated for about a month now, tracing out a pattern of higher highs and higher lows with the current short-term uptrend closing near the midpoint between the previous two highs. This type of consolidation behavior within a strong uptrend often develops into another pennant or an even more bullish ascending triangle. Of course, we'll need to see more price data before either type of chart pattern can take form, but we can also compare gold in US dollar terms to the currency independent GCI and look for either corroborative behavior or a suggestive divergence:  In fact, the GCI does display a positive divergence as price action is already testing those recent long-term highs, suggesting that the more bullish ascending triangle consolidation formation is more likely than the pennant at the moment. Although it is presently only a slight positive divergence, it is notable and worth monitoring as past divergences between the GCI and gold in US dollar terms have nearly always provided important, predictive signals. Outlook As always, there is no way to know for certain where future price action will take us. However, using technical analysis we can readily identify different scenarios and draw well reasoned conclusions about their likelihoods. Given the strength of the current price action and the developing positive divergence between the GCI and gold in US dollar terms, it is more likely that the current uptrend from last September will extend once this period of consolidation is complete. Anything can happen, of course, so it will be important to continue monitoring the situation as it unfolds. Feb 8, 2008 Daily GCI updates are provided at Prometheus Market Insight. 321gold Ltd |
