October 16: Gold Update

Our favorite friend, the yellow metal, may be facing a reasonable consolidation if the dollar continues to strengthen a bit.  As we reported yesterday, there's a decent chance that we have a false breakdown in the dollar from the 76 level, ala the pattern we saw at the 78 level.  Given that all assets have been overbought short term, and the dollar is oversold short term, the likelihood of a false breakdown is high.  We do not believe we will see a major rally yet, only that the dollar stands a chance at a minor rally back near its 50 day moving average.

Assuming that the dollar doesn't break down here (check out yesterday's article for more on the key levels), what can we expect from gold?

For months now, we've been reporting on the big, complex, inverse head and shoulders pattern that we believed would be activated when some of the symmetrical triangle patterns that were forming had a breakout.  That is, indeed, what occurred.

You can see on the weekly chart that the neckline runs through the 1025 region on the gold price.  The target for this pattern is, minimum, 1300 over the next several months.  The only thing that will inactivate this pattern is if gold were to fall below its head region, around 700.  This is one of the most reliable patterns out there, so the likelihood of gold running all the way to 1300 is high.  Given the inverse correlation to the dollar, the implication is that the dollar is going to face a significant decline, as we discussed on October 8.  Keep in mind those key dollar levels, notably the 68 level we discussed yesterday.

Longer term, gold is going up.  Is now the time to buy?  We do think that if you missed the "under 1000" train, that you're going to want to catch the "under 1050" train this time around.  Looking at the same formation on the daily chart, we can see the neckline clearly at the 1025 level.  Note that that level was also resistance a few weeks ago.  It is also in the region of the Bollinger Band centerline. 

The RSI is coming off of an overbought condition, with more downside likely for gold.  The stochastic is strongly overbought.

A closer look at the daily chart shows the near parabolic rise in gold when it both broke out of the symmetrical triangle and when it broke 1024/1025.  There is some minor support at 1040, but it may not hold.

We are looking for a short term pullback over the next couple of weeks that will test 1025.  We believe that 1025 will stand at this stage and that it would be a good entry point.

Longer term, gold needs to consolidate over many weeks to a few months.  Given the seasonality and lack of support for the dollar before the 72 range, we don't believe that gold will take any major breaks in its run up until late spring/early summer next year.  At that stage, the consolidation may be substantial, providing another entry point as it shakes out the momentum traders.