Gold and gold stocks have been taking a breather during the past month, after an impressive run which saw the gold price add nearly $200 in just two months and the HUI rocket 50% during that same time period. Gold has been hovering around the $800 mark and the HUI has been just above 400, both of which should turn into support for the next phase of this upleg.
I use technical analysis to help gauge the future direction of gold and gold futures, but caution against putting too much faith in any single predictive methodology. While I have found it to usually be a reliable indicator, I have also been burned by what appeared to be beautiful technical set-ups and buy signals followed by a sharp decline. And of course the past is not always a reliable indication of the future. But disclaimers aside, the technicals for gold and gold stocks are looking very strong at the moment and all signs point to a resumption of the uptrend in the coming few weeks. Let’s take a closer look at the charts and see if you agree.
Featured above is the 3-year price history for gold. Notice this history includes the last major upleg of the gold bull, which we will use as a guide to how the current upleg might unfold. Beginning in January of 2005, we witnessed a 9-month consolidation in the gold price. This was followed by upleg #1 and then a “breather” period of about 6 weeks. The breather period allows the bull to catch its wind, investors to take profits and a foundation to be built from which upleg #2 will be launched. And that is exactly what happened last time, as the breather period was followed by gold adding another $180 during upleg #2.
Looking at the same chart, the current upleg appears to be mirroring the upleg of 2005. We had a 9-month consolidation period followed by a sizable gain during upleg #1 and a “breather” period, which is exactly what we are experiencing at the moment. If history repeats, we should see the bull get kicking again before the end of the year and propel the price of gold easily above $1,000. So, how close are we to the start of upleg #2? Let’s take a look at the short-term chart for the HUI to get an indication.
The chart above shows the gold bugs index over the past six months. Notice that the HUI has just dipped below its 50-day moving average. With the exception of the massive selloff in August, this trendline is typically a reliable indication of short-term support. The HUI has also just touched on the lower trendline of the channel, another sign that support has been reached and a movement upward is likely. If the HUI does bounce off this line and reach towards the upper trendline of the channel, we can expect to see 490 or 500 before there is any technical resistance. This move would represent a gain of more than 20% from current levels and could happen in as little as 4 weeks time. Still not convinced? Let’s take a look at the chart for the U.S. dollar.
The dollar has rallied about $1.70 over the past few weeks. But with the Fed likely to cut interest rates next week and the dollar hitting resistance at its upper channel trend line, I fully expect the dollar to continue its plunge. This further weakening of the dollar may be the key ingredient to propelling gold above $1,000 in the first quarter of 2008.
In conclusion, there is a strong likelihood that gold will find support at $800 over the next few weeks and enter into the second phase of this upleg, pushing the metal above $1,000 for the first time. It is worth mentioning that while $1,000 seems like a lofty figure, it is still less than half of the inflation adjusted high from 1980 ($2,150). If we adjust the 1980 peak of $850 for inflation, gold would need to reach above $2,150 before making a new all-time high. $1,000 gold will look cheap in the near future. Are you positioned to profit from the next major move?