Friday, May 29, 2009

5 Reasons To Be Bullish On Gold

Before getting to our analysis, let me first state that I hate snappy titles like the one I have used for this article. You know, "4 Reasons To Be Bullish On Blah, Blah, Blah....". They feel self-promotional and somewhat amateurish to me, and this makes me nervous. I always prefer to be business like in my approach and let the objectivity of my tools (i.e., indicators) do the talking.

Nonetheless, I believe (and have believed for several weeks now) that the current technical dynamic in gold is potentially very bullish, and I believe we are beginning to see confirmation of such a scenario. So in this instance, I will use the headline (as above) because I am told these are the kinds of headlines people like to see!!

The first factor I have been writing about is the launching pad. Figure 1 is a monthly chart of a continuous gold futures contract, and the indicator in the lower panel looks for statistically significant periods of price consolidation (i.e., the launching pad). As we can see, gold is on the proper launching pad to make a sustainable bullish move.

Figure 1. Gold/ monthly

The second factor is the price action. Once again, refer to figure 1. A monthly close above 884 was the first bullish sign (see point 1). The retest came at point 2. The "breakout" is now occurring at 945. This is our new level of support.

The third factor is the price pattern. This can be seen in figure 2, a weekly chart chart of the SPDR Gold Trust (symbol: GLD). The inverse head and shoulders pattern is obvious, and a break out from this pattern should carry prices to the $120 level.

Figure 2. GLD/ weekly

The fourth factor is the US Dollar Index (symbol: $DXY). Our Dollar model was going to give a sell signal at the end of this month, so the pressure of a higher dollar is no longer a headwind for gold. A weekly chart of the Dollar Index is shown in figure 3, and the quasi head and shoulders top is noted. The neck line is at $80.74. As noted previously, it was difficult for me to gauge how fast and how far the Dollar might fall. Today's drubbing may be providing a clue. Nonetheless, a weaker Dollar favors gold.

Figure 3. $DXY/ weekly

The fifth factor is gold's performance relative to a basket of 8 currencies. Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. As seen by the indicator in figure 4, gold is now "breaking out" and out performing those currencies.

Figure 4. Gold v. Currencies/ weekly

So let's summarize. Gold is on the launching pad that could carry prices to the $1200 level.

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