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Gold just broke its “neckline.”

If you’ll recall, in August I wrote about the massive inverse head and shoulders pattern gold had formed during the last three years. I presented the below chart to illustrate this:


At the time I wrote:

Gold has formed a long-term inverse head and shoulders formation (two smaller collapses book-ending a major collapse). Typically a head and shoulders predicts a massive collapse. However, when the head and shoulders is inverse, as is the case for gold today, this typically predicts a MAJOR leg up.

Indeed, any move above the “neckline” of 1,000 would forecast a major move up to $1,300 or so.

Well, last week, gold broke the neckline:


As you can see, gold’s recent rally took it above the critical point of upward resistance. This indicates that the next leg up in the gold bull market has begun. The reason here is simple: investors have begun to realize that every central bank on the planet is hell bent on devaluing their currencies.

Interestingly, this new breakout corresponds perfectly with historic trends. As I wrote in August:

If we were to go by the historic pattern of the gold market in the ‘70s, gold should experience upwards resistance for 19 months after its first peak today. Gold’s recent peak was $1,014 in March ’08 (roughly 17 months ago).

If this bull market parallels the last one, then gold should renew its upward momentum in a very serious way starting in October 2009. And this next leg up should be a major one (the biggest gains came during the second rally in gold’s bull market in the ‘70s).

Everyone and their mother believes the Fed’s actions are hurting the US dollar. But few people have taken noticed that the Europeans don’t want a strong euro, just as the Japanese don’t want a strong yen, just as the Swiss don’t want a strong franc.

Why?

None of these guys want their currencies to appreciate too far against the dollar because most if not ALL of them export to the US or trade products based in dollars. Having a strong currency against a weak dollar means increased production costs against a lower sales price. This means lower profitability.

To combat this, countries are either aggressively printing money to stimulate their economies (China, Europe, the UK) or openly manipulating their currencies (Switzerland) in an effort to devalue their money against the dollar. Case in point, this latest breakout in gold happened without the dollar falling to a new low:


As you can see, gold broke out dramatically this week, but the dollar failed to fall to a new low. This tells us that gold is beginning to decouple from the dollar and is soaring as investors the world over flee paper money in general. And of course, they’re piling into the one currency that cannot be devalued: gold.

So where will the precious metal go from here? The above head and shoulders pattern forecasts a move to $1,300. But if we truly get gold mania (as we did in the late ‘70s) gold could rise 750% (that was how high gold rallied from August ’76 to January 1980 during the last gold bull market).

If gold were to rally 750% from its recent low of $700, that would put the precious metal at $5,250 per ounce.

I know, the idea of gold above $5,000 an ounce seems ridiculous to me, too. But gold has produced these kinds of returns before. And with virtually every central bank on the planet printing money in an effort to stimulate their economies, it’s not hard to see how gold mania could push the precious metal to prices that seem outlandish today.

In light of this, I suggest having some exposure to the precious metal. Gold’s had a wild ride since 2000, but if this gold bull market continues to mirror that of the ‘70s (as it has so far) then we’re in for some real fireworks in the next couple of years.

Source: Gold's Next Bull Market Has Begun