A technical review of the gold
David Fuller's view The
obvious point is that bullion remains
within its secular bull market which first became evident in 2001. The challenging
questions include: how high will it go on this move; how strong will it be relative
to other markets, including currencies; when will the next significant correction
occur; what could end the bull trend and how will we recognise it?
These are not easy to answer but the first point is that
gold is slightly overbought in the short
term so we may see a brief pause and consolidation before long. However,
the overall pattern appears well supported by the post-December 2009 correction
and ranging consolidation in response
to the last significant overextension relative to the trend mean, depicted by
the rising 200-day moving average.
For students
of factual and behavioural technical analysis, there is no evidence of Type-1,
2 or 3 top formation development as taught at The Chart Seminar. The most significant
correction in the overall uptrend to date occurred, not surprisingly, between
March and October 2008. The high in 2008 occurred from a clearly overextended
condition relative to the MA and was confirmed by a dramatic weekly key reversal.
Bullion fell by over 30% and the MA actually turned downwards. However, gold
continued to show remarkable relative strength by falling less than any stock
market index or other futures-traded commodity. It was also quick to bottom
and retrace the decline.
Returning
to the current position, negative factors are the short-term overbought condition
mentioned above, plus further competition from stock markets and other commodities
if confidence continues to return following the fall back in Southern European
sovereign debt yields, the Goldman Sachs hearings and last Thursday's high-frequency
trading blow-out. Additionally, the overhanging possibility of further bullion
sales from the IMF remains. Cyclically, gold's seasonal window of superior performance
is beginning to close. Close observers of the gold cycle will know that the
2008 peak occurred in March and the 2006 peak in May. Finally, the biggest long-term
threats to the gold bull trend will be higher interest rates. One could add
that gold is expensive for jewellery and industrial uses, which is true, but
investment demand is the crucial variable today and mostly likely in future,
at least until this secular bull trend ends.
Meanwhile,
if gold experiences a similar numerical advance to what preceded those last
two cyclical peaks mentioned above, it should rally to between $1300 and $1400
on this current move, as I have mentioned on occasion since the September 2009
breakout. A similar percentage move would carry higher still.
If you
are interested in gold, one of the most important sections in the Library's
dropdown menu is Relative Charts. Veteran subscribers will recall that gold
does best when it is appreciating against all paper currencies. You would have
expected gold to romp against weak sterling
and the euro, and it has. More importantly,
it has strengthened once again against this cycle's comparatively hard resources
and Asian currencies such as: AUD,
CAD, INR,
SGD, ZAR
(the break in lower rally highs could be important) and BRL.
Pressing home an important point, here is gold in the Asian
Dollar Index and Latin American Dollar
Index. To show what can go wrong when there is no international confidence
in a currency, here is gold in Venezuelan
Bolivars (VEB). Remember when the Swiss
franc was "as good as gold"? No more. I could post many more from
the Library but you get the picture.
How
is gold doing against stock markets? The key comparisons are with the USA. Here
is the Dow/Gold Ratio and also
the S&P in gold. They appear
to be weakening within the current ranges. The Gold
Bugs Index has lagged but new appears more likely to sustain a break above
psychological and lateral resistance near 500.
My guess
is that gold is no more than about halfway through its secular bull market,
in terms of time. However this is certainly not a bankable forecast. I maintain
that most very long-term forecasts are extremely inaccurate, mine included,
and based on little more than trend extrapolations. My long-term view is based
on the length of the previous secular bear market for gold (21 years) and earlier
long-term commodity cycles. Last but certainly not least, there is the breathtaking
issue concerning unprecedented printing of paper money by all countries or the
central banks of their respective currency unions.
Another
hunch, which I have mentioned before, is that gold will eventually end in a
true bubble, characterised by the sort of dramatic upward acceleration not seen
since 1979. That would be the Type-1 ending from TCS. Meanwhile, if seasonal
factors are to be an influence this year, we could get a medium-term Type-1
peak in the next few weeks, as seen in May 2006, March 2008, and to a lesser
extent and unseasonally, December 2009. First, however, I think gold would have
to move to at least the $1300 to $1400 region, becoming more overstretched relative
to the MA. There is a chance that the next medium-term peak will not occur until
2H 2010, due to the extensive reaction and consolidation recently completed.
The charts will show us.
If none
of this come to pass due to either my bad forecasting or some exogenous event,
the first clear evidence of pattern deterioration would be a dramatic downward
dynamic and / or break in the progression of higher reaction lows.