Cliff Wachtel's  Instablog

The coming days may be your last chance to get gold before $2000 /oz becomes a fond memory.

From both a fundamental and technical perspective, gold looks ready to break out. Of course, the recent modest pullback has once again brought out the warnings that gold is a bubble. However these are typically based on sentiment or momentum indicators, which don’t mean a lot when the long term fundamentals behind a move remain strong and in place, as we’ll discuss below.

On the daily charts, gold has formed a classic pennant pattern comprised of lower highs and higher lows, indicating the balance of power between buyers and sellers is becoming even.

GOLD DAILY CHART COURTESY ANYOPTION.COM     01sept 14 0949

After gold’s recent burst higher in early-mid August, some pullback would be expected, however, as the pennant pattern shows, while gold’s been falling modestly on normal profit taking, buyers have been stepping back in at higher levels. We also note that the 20 day EMA (yellow) has generally been a support zone since at least February 2011 with few brief exceptions.  In general a pennant is a continuation pattern, meaning gold could be getting ready for its next move higher.

Certainly the fundamentals exists to create more of the kind of ongoing anxiety about both the USD and EUR that has been driving gold higher for years. Remember, gold is neither a safe haven nor risk asset in the classic sense. Rather it’s a currency hedge, particularly against declines in the two most widely held currencies, the USD and EUR. See here for more on the myths and facts about what drives gold.

Here’s a quick review of what’s likely to continue demand for such hedges in the coming weeks.

Longer term the fundamentals that have powered gold higher remain

There are rising risks of more potentially currency devaluing stimulus in both the US and EU (elsewhere too, but flight from the USD and EUR is what’s been driving gold).

Either a new round of cash for Greece or Greek default should add fuel to the flight out of the EUR over the coming months, though in the short term we could see brief EUR rallies as markets jump around on rumors.

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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?