The Insightful Trader

Gold Bugs Rejoicing – Is This Breakout for Real?

by on Sep.08, 2009, under Market Commentary

With the recent breakout of gold on the daily chart, gold bugs are ecstatic, as they can now point their fingers and say “We told you so” and indeed gold has had a remarkable run over the past number of years as seen by the chart below.
$GOLD weekly 90809

I have to admit to being somewhat of a precious metals advocate myself, but probably more of a silver fan and not obsessively so at that. One of those things that I think everyone should have some of in their portfolio. But is the overwhelmingly bullish stance on gold justified?

I don’t know about you, but I get awfully nervous when nearly everyone lines up on one side of a trade. Since there seems to be as much, if not more concern about deflation, than inflation among the world’s central bankers including a newly released UN report calling for continued loose money, then perhaps what we’re seeing is a longer term hedge. But according to a recent report from John Mauldin, gold hasn’t had a good correlation with inflation for nearly 30 years. So if that’s the case, what’s that do to the price movement based on future inflation concerns. Is there some other catastrophe lurking out there unforeseen by the rest of us mere mortals?

What of the dollars resilience in all of this? Although hit some the past several days again, it’s stubbornly refusing to make a swan dive, though short term we could see some further weakness technically.
$USD 90809

You can see from the attached chart where our next support levels are, with fairly significant support at the 76 range, and then at 74.50 we have have the 78% fib retracement range.

So let’s look at the gold charts again here. As seen below, we broke above our down trend line on the daily.

$GOLD 1yr daily 90809

Looking at the daily, we see that although we’ve broken the line, we still need to get a close above 1007 to confirm. Now looking at the weekly chart, it gets a little more interesting.

$GOLD 2 year weekly 90809

Though an attractive potential  inverse head and shoulders formation, as you can see, we’re not out of the woods yet. And even if gold can close above 1007 on a weekly candle, we’ve still got potentially strong resistance back into the 1030 level.

So, in summation, don’t put your blinders on just yet. Though gold is definitely looking strong, and the momentum traders are frothing at the bit, the potential for large and or quick gains from this point may be more daunting than most realize. And if you take comfort from the fact that everyone else you know and read are as bullish as you may be, then take a minute and think about what the the least popular trade you could possibly make is.

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1 comment for this entry:
  1. ceebee

    thanks racer – good to see you posting again


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