The price of the yellow metal closed on Friday's Globex close at a new weekly high of 1,732.2 per oz, a gain $68.2 per oz or +6% for the week. This confirms a weekly upside bullish reversal breakout. Once the market took out the 1680 resistance levels, it blew the lid off the resistance trendline above connecting the highs in 2011 to close near the highs for the week at 1,739.8 basis the February Comex Gold Futures contract.
The technical reason why this weekly breakout is so important is because it's breaking out to the upside from what most technical analysts call a down flag formation. This is a very bullish pattern as it confirms the energy was strong enough to test the bottom of the range at 1,535, where it found physical support reversing to the 1,680 Fibonacci retracement levels and closed almost $100 dollar higher in 5 days, as indicated in the chart above. This puts the paper market into the hands of the bulls technically and is obviously well supported by very strong hands in the physical market.
The US Dollar Index closed lower for the second week in a row reversing the bullish pattern that was established previously. With the market's weekly close of 79.01, below the 20 day moving average of 79.15, it has negated the previous weekly uptrend to neutral. A weekly close below these levels would potentially start a major downtrend and set the stage for the index to challenge and test the 75 area of support.
The fundamental reasons supporting for a continuation of the secular decline in the value of the dollar remains well in place. The FOMC last week confirmed the zero-based interest rate policy will remain in place until 2014. As a consequence, real interest rates remain ingrained into negative territory accounting for inflation, chipping away at the long term strength and integrity of the US Dollar as a the world's reserve currency. This sets the stage for QE3 to infinity in the US and the start of what could be at the beginning of an ongoing historical stimulus package by the ECB.
The money supply growth rates remain in an uptrend. M2 rose nearly 10% in the last 12 months. With the US and eurozone debt and deficits way out of control, the only obvious solution seems to be a graduated resolution of default through inflation and potentially running the risk of hyperinflation globally.
It appears the US Dollar continues to undermine the seriousness of the long term effect it will have if we continue to maintain the current level of debt ratio to the GDP. This is unsustainable over the long term as the path of least resistance is for rates to inevitably begin to rise and the level of the interest payments to service the debt will exponentially explode and accelerate the debt ratio to unsustainable historical proportions with some very profound global consequences.
Look for the gold market to challenge the 2011 highs of 1,920. A weekly close above this level sets the stage for an acceleration pattern to develop challenging the upper end of the next fractal pattern resistance area that identifies this level as 2,190. This new all time high should unfold into the late part of spring or early summer period of 2012.