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Gold's Price Pattern Points to Sharp Break-Out, Bank Analysts Target 39% Rally

Commodities / Gold & Silver 2009 Sep 01, 2009 - 07:30 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD fell as London returned from the Bank Holiday weekend on Tuesday, dropping all of Asia's 1% bounce and recording an AM Gold Fix at $949.75 an ounce.

European stock markets also fell, losing 1.2% in London and 1.5% in Frankfurt.


Crude oil dropped below $70 per barrel. Government bond prices rose.

"Gold has not moved from the $950 mark for the past seven weeks," notes London market-maker Scotia Mocatta in its technical analysis. "The longer we consolidate sideways the bigger the directional move we will see when it does break."

Gold's "shrinking triangular" pattern is now bounded at $934 and $964, says Scotia Mocatta, and "a close on either side of those parameters should yield $865 or $1032" – the previous Dollar-price high, hit when Bear Stearns collapsed in March 2008.

"The trend over the past several years has been to advance, then consolidate; then advance; then consolidate again; then advance once more," writes Dennis Gartman, author for the past 27 years of the $5,000 Gartman Letter.

For UK investors looking to Buy Gold, and "after the recent consolidation that has taken several months to develop, it appears that gold is heading higher once again and a close above £590 would be most impressive," he writes.

Today the Gold Price in British Pounds dipped to £585 an ounce after briefly touching £590 in late Asian trade on Monday.

Sterling meantime dropped 1.5¢ to the Dollar on news that new UK consumer lending turned negative in July, shrinking the outstanding total for the first time since records began in 1993.

The broad money supply, in contrast, grew by 14.5% from a year earlier as financial companies hoarded cash and credit.

"We remain bearish on the Dollar," says Steven Barrow, chief currency strategist at Standard Bank in his latest Currency Monthly, "while our concerns over the Pound have been raised by the Bank of England's decision to press on with more Quantitative Easing.

"The Euro and the Yen come somewhere in the middle of our currency league chart, while the top is populated by commodity currencies like the Aussie, Kiwi, Canadian Dollar and Norwegian Krone."

Today the US Dollar bounced against the Euro and also rose vs. the Yen. The major commodity currencies fell alongside crude oil and base metal prices.

In gold, a break of February's peak at $1,006 – some 6% above today's price – would "confirm the completion of a continuation head-and-shoulders pattern," says Barrow's colleague Darran Grabham.

"The eventual target is $1,325 an ounce," he says, more than 39% above Tuesday's fix.

On the downside however, a drop below the "support trendline" – a line starting at July's low of $906 and now sitting at $935 an ounce – could see gold "encounter support around the $906.50 level," says Grabham, Standard Bank's technical analyst, "before a break lower yields a move to a secondary objective of $890."

Looking at Gold Investment demand, and "after nine weeks of selling," writes Wolfgang Wrzesniok-Rossbach in his Precious Metals Weekly for German refining group Heraeus, "[late August] saw a slight change in trend in the ETFs, as investors increased their engagement.

"However the open positions on the futures exchanges have dropped four times as much as the Gold ETFs have added. As such the international investors as a whole were not really very supportive of the yellow metal. Additionally physical usage by industry continues to suffer as well."

Noting only "modest demand" from India ahead of the traditionally strong post-harvest festival season, Edel Tully at Mitsui writes that "Above $975, scrap flows are likely to accelerate. A move towards $900 would ignite fresh buying interest once again and, as such, help to provide a price floor to this market."

Mitsui's latest Refining Monitor also reports that sentiment amongst precious-metal refiners towards coin production fell last month to its lowest level since June 2005. "So long as safe haven demand wanes," says Dr.Tully, "we estimate the tame demand rate will persist."

Near-term, speculative dealing in Gold Futures and options maintained a strong influence over the metal's price last week, according to data from US regulator the CFTC.

Rising back above 500,000 open contracts and more than 8% above the average size since 2004, the volume of US futures and options bets between start-June and end-August showed an average correlation with weekly changes in the US-Dollar Gold Price of +0.84.

It would stand at +1.0 if they moved together by exactly the same proportions week to week. This summer, the connection between Gold Prices and the volume of Gold Futures was more than twice its 5-year average – itself a statistically significant correlation of +0.41.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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