Amex Gold Bugs Index broke through long-term resistance at 600 last week and is now retracing to test the new support level. Respect of 600 would confirm a primary advance to 700* — a bullish sign for spot gold prices.
* Target calculation: 600 + ( 600 – 500 ) = 700
Gold is rising in a super-trend which has lasted for more than 10 years. The primary trend, however, is accelerating as the debt crisis in Europe evolves. European banks are now in a precarious position and default of a single debtor nation would cause a crisis of confidence. The situation is similar to the 2007 sub-prime crisis which was accompanied by a similar surge in demand for gold.
Two events stand out. In March 2008 the Fed rescue of Bear Stearns reassured the markets, easing demand for gold and resulting in a 30% retreat in the spot price from its peak at $1000/ounce. The second event was the September 15th collapse of Lehman Brothers. Gold surged 20% in a matter of days, as confidence in the Fed’s ability to contain the crisis was shaken, before settling back at $700 by November. It then commenced the current bull run, climbing 170% so far from its 2008 low.
The question is: are we facing a “Bear Stearns” event that will reassure financial markets or another “Lehman”, causing a flight to safety? Current European dis-unity suggests a crisis of confidence and surge in demand for gold.
The daily chart shows a bullish ascending triangle, indicating further accumulation. Breakout above 1900 would signal a fresh advance to 2100*.
* Target calculation: 1900 + ( 1900 – 1700 ) = 2100
The situation can change rapidly, however, and some contrarians believe that gold is over-bought. Reversal below support at $1800 would break the ascending pattern and rising (secondary) trendline. All bets are then off and reversal below $1750 would complete a double top, threatening correction to $1500.
With Europe awash with stories of the imminent default of Greece, and German banks told to prepare for a 50% haircut on Greek bonds [Bloomberg], this would be a good time to buy gold. Any rupture in current bailout arrangements would cause a flight to safety, driving Treasury yields even lower and gold even higher. Breakout above $1900 would confirm a fresh advance, with a target of 2100*.
* Target calculation: 1900 + ( 1900 – 1700 ) = 2100
Added in response to question: Reversal below 1800 is unlikely but would warn that the ascending triangle formation has failed.
Spot gold found short-term support at $1800/ounce. A rally to $1900 from this point would form a bullish ascending triangle, suggesting an upward breakout and offering a target of $2100*. Failure of support, however, would penetrate the rising (secondary) trendline and suggest a correction to $1500.
* Target calculation: 1900 + ( 1900 – 1700 ) = 2100
Gold Bugs ($HUI) and Gold Miners ($GDX) Indexes both broke through resistance to signal a fresh primary advance. With a target of 700 for $HUI, the breakout favors continuation of the current advance in spot prices.
* Target calculation: 600 + ( 600 – 500 ) = 700
The Gold Bugs Index, representing unhedged gold miners, threatens to break through resistance at 600 which would signal an advance to 700*. Upward breakout would negate the earlier bear signal from penetration of the rising trendline — as well as strengthening prospects of a further advance in the spot price.
* Target calculation: 600 + ( 600 – 500 ) = 700
Spot gold has so far respected the secondary trendline and support at $1750. Short retracement from resistance at $1850 would be a bullish sign, suggesting an upward breakout. Recovery above $1900 would test $2000, though the calculated target is even higher*.
* Target calculation: 1900 + ( 1900 – 1750 ) = 2050
Upside potential for gold remains strong. Treasury and the Fed are running out of options to revive the economy and further quantitative easing grows ever more inviting despite the inflationary outcome. With presidential elections looming in 2012, the White House will also be doing their best to influence the Fed decision.
Two weeks after the CME hiked gold margins by 22%, and two days after the Shanghai Gold Exchange sent them higher by 26%, here comes the CME, as we expected, with another 26% gold margin hike. And now we know that this particular margin hike was leaked well in advance, and explains the entire $100 plunge in gold today.
The CRB Commodities Index did not follow gold lower and is testing resistance at 335. Respect of resistance, signaled by reversal below 325, would confirm the primary down-trend — offering a target of 295*. Penetration of the declining trendline is unlikely, but would warn that the down-trend is weakening.
* Target calculation: 315 – ( 335 – 315 ) = 295
Rising stocks and a sharp fall on spot gold reflect uncertainty as to whether Ben Bernanke will announce further quantitative easing by the Fed, at Jackson Hole, Wyo. on Friday. Further purchases of Treasurys by the Fed would lift inflation and send investors scrambling for inflation-hedges like gold and blue-chip stocks. Stocks are rising, but gold is falling. Could it be that promise of an end to the conflict in Libya makes the world a safer place — or that a resulting fall in oil prices would reduce inflationary pressures? Brent crude and the CRB Commodities Index are both rising, suggesting that the precious metals blow-off is driven by profit-taking — after the sharp surge over the last few weeks and ahead of an uncertain announcement on Friday.
Spot gold is testing its secondary [green] rising trendline at $1700/$1720. Support is likely to hold — especially if there is any hint of QE3 on Friday — but failure would warn of a fall to the long-term trendline around $1500/ounce.
* Target calculation: 1900 + ( 1900 – 1700 ) = 2100
The monthly gold chart shows spot gold testing the upper trend channel of the long-term bull-trend. Correction to the lower channel would result in a substantial fall. A lot depends on what happens Friday.
