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Gold Consolidation – Over and Done or More to Come?

|Includes: DGP, DGZ, DIA, DZZ, GDX, GDXJ, SPDR Gold Trust ETF (GLD), IAU, JJM, JJN, PTD, PTM, SLV, SPY, UBG, UBM, UDN, USV, UUP

Gold Consolidation – Over and Done or More to Come?

In a now-infamous 2002 speech, Ben Bernanke said:

(…) The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost… Under a paper-money system, a determined government can always generate higher spending and hence positive inflation…

 

This week in a dramatic effort to rev up a "disappointingly slow" economic recovery, the Fed said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth. This is known as QE2, the second round of quantitative easing.

 

A year and a half after the first round of quantitative easing Ben Bernanke confronts an economy hampered by high unemployment, a gridlocked political system and the threat of a Japan-like period of deflation.

 

The big news Thursday after the Fed declaration was the $40 price increase we saw for gold. The question is whether this is a break- out or a fake rally. We will attempt to shed some light on this question.

 

In this week’s very long-term chart saying (charts courtesy of http://stockcharts.com), we first see that gold did not move above the upper border of the very long-term (including the whole bull market) trading channel. As we have discussed previously, some consolidation was expected. Has this already been seen in its entirety or is more yet to come? There does not appear to be enough information at this time to make this call. Three daily closes above the thick blue line in our chart or huge volume corresponding to a rally from here would confirm that consolidation has completed.

 

Focusing on the solid blue lines for a moment, a breakout above this upper border would likely be followed by a move to $1,500 or so in the following months. Until such a breakout is seen, gold may simply not move significantly higher - in that case it would be likely to correct once again.

 

The dotted lines in our chart have been inserted as a result of Subscriber question regarding gold’s recent trends being analogous to what was seen in 2007. This is not the case in our view, for at that time, no important resistance lines were being touched. Furthermore, the short-term trading channel was not close to gold’s price level in 2007.

 

A consolidation had been seen for over a year and was followed by a sharp rally. Gold would need to be close to $1450 today and eventually move to $1600 if the 2007 trend were truly repeated, that is, similar % price increases been applied today. This seems to be an unlikely scenario (taking the previously mentioned $1,500 target into account), and we do not feel comparisons to 2007 are meaningful. Simply put, each year saw a rally and a meaningful correction but little else can be said about striking similarities between ’07 and ‘10.

 

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Thank you for reading. Have a great and profitable week!

 

P. Radomski

Editor

www.SunshineProfits.com

 

 

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