MoundReport.com's Monthly
Gold Report
Gold Consolidation - Warning
of Pending Failure
James Mound
JMTG's Head Analyst
Aug 8, 2005
For months I have been expressing
my bearish view on the gold market, telling followers and despisers
alike that gold is setting itself up for a pending collapse.
The telltale signs are there, but everyone seems to get so caught
up in the short term fluctuation that they fail to realize that
gold is just toggling back and forth ahead of its next major
move. This near term consolidation doesn't prove or disprove
any particular theory, but rather builds on declining volatility
and overall market consolidation indicating a greater potential
for an explosive price move in the near future. I write this
article as gold tests some critical pennant resistance, suggesting
a selloff in gold prices is critical over the next two weeks
to fill out the pennant and offer a breakdown below support.
The US dollar is also at a
critical price juncture. My forecast for a channeled US dollar
(87-92) for the rest of 2005 is still alive and well, but current
prices are near the lows of this forecasted channel and the market
needs to find price support in and around 87 to hold up. When
the market does find support at these prices you will see a massive
correction in gold. Keep in mind the recent fallouts in copper,
where a bull market failed multiple times for one day price moves
that approached 10% declines in a single day! This is far from
impossible and even a likely event in gold if this consolidation
pattern continues. This week offers the potential for such a
move, not only with critical price junctures in both oil and
the US dollar, but also because of the FOMC meeting, bond auction,
and plethora of economic reports to end the week. If you look
at a consolidation pattern and look ahead to what can break that
pattern, then this week has breakdown with volatility written
all over it.
Consolidation patterns indicate
a market's pause ahead of a major move, proven by historical
evidence in all markets. This tends to happen frequently as the
market digests new highs or lows, or if we see a lack of fundamental
news to shift a market. Gold falls into the latter category as
it has set a high and a low based on the most recent action in
world events and, in particular, in the US dollar. One could
debate that this pattern near the top of a long term uptrend
is indicative of a market pausing ahead of fresh highs, otherwise
known as a bull flag. However, previous bull flags in gold over
the past few years have not breached the long term arch and have
not pressed the low end as aggressively as this current market
condition. Moreover, the longer the consolidation the greater
the likelihood that the market will fail its current trend, and
in this case that suggests that gold is due for a serious correction.
Put options are so inexpensive,
not only because of the lack of speculative interest in playing
the downside in metals, but also because volatility in gold has
been decaying for months. Gold is on the cusp of a major move,
and if you are a long term US dollar bull like me you take these
opportunities to reinforce your position at great entry points
to play a downside correction. I remain firm in my prediction
for sub $400 gold and possibly a test of $360, and have yet to
see a significant indication either way in the underlying shorter
term price moves. On an intermediate term view we are witnessing
a test of critical resistance in gold and therefore an ideal
short entry point utilizing puts to play a foreseeable correction.
Aug 8, 2005
James Mound
JMTG's Head
Analyst
email: info@Moundreport.com
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