Gold and Silver Analysis - Precious Points: Liftoff?

By: Joe_Nicholson

“If … an ongoing correction pattern since the May 2006… proves to be the case, gold will have to plunge at least to the 50-week moving average and quite possibly lower. Hence the caution expressed in the newsletter recently. If the gains in precious metals are not corrective and in fact are already the start of a truly impulsive bullish wave, then not only will the target for the corrective wave be exceeded, we could easily see gold move over $800 and challenge nominal all time highs.

Until there's confirmation, it's dangerous to do anything more than short term trading or small purchasing in precious metals, but soon we'll know for sure and the next move for the metals, whichever direction, is going to be like a rocket.” ~ Precious Points: T-minus Five, Four, Three … , October 06, 2007

Two weeks ago we said gold was approaching a moment of truth, and it is. A look at the daily chart below reveals the triangle pattern that had been unfolding all month and which motivated the statement that the next move would be like a rocket since, typically, triangle patterns resolve with a powerful thrust.

So, we didn't get our liftoff last week exactly as expected, or perhaps it's still playing out, but the issue for the bigger picture in gold remains. Remember, what has to be decided is whether this is the middle part of a corrective pattern from the 2006 highs or the start of a new impulsive bull leg. The corrective pattern would anticipate an abc up that sells off sharply. The triangle from which gold seems to have broken to the upside just som happens to put in a beautiful b wave and keeps the possibility of that deep retracement alive. Bullish counts exist, of course, but until the corrective count is invalidated by exceeding the target levels reserved for TTC members, making huge bets on gold is simply not advisable.

Last week's update said, “if silver cannot get back above $13.55 quickly next week, there should be more concern over whether it will hold $13.25”. Well, silver did fail to surpass $13.55 on Monday and retested $13.25 the following day. That level held though, and silver went on again to challenge $14, which for now at least remains a psychological resistance level. Ultimately, silver will probably take its general direction from whichever outcome is decided for gold, leaving a very bullish future with the possibility of one more correction first.

It's become common lately for precious metals analysts to say central banks' actions affect the price of gold as if it's some sort of revelation. Meanwhile, central bank activity has been a central theme of this newsletter since its inception. The triangle pattern in gold has played out as a tug of war also ensues between the euro and the dollar and their respective central banks. Despite mounting evidence that speaks to the contrary, the ECB continues to signal a bias toward higher interest rates while expectations for further rate cuts in the US , though decreasing, persist. It's quite likely that the positions of both banks will soon be reversed and, as described previously, a reversal in the dollar could certainly be the catalyst that starts a correction in gold.

There's also been a growing sense that gold has to go higher from here because the Fed no longer “cares” about inflation. Of course, nothing could be further from truth as the minutes from the September 18 minutes explicitly contradict such an absurd notion. The Street seemed to shrug off the much higher than expected PPI data last week, but it is unlikely to do so again if CPI comes in above expectations. The Fed is most certainly still watching inflation, is aware of the risks if the dollar continues its plunge, and can revise its estimates upwards just as easily as downwards. Odds are increasing that the Fed will hold steady on Halloween, making the greatest risk to the rally in gold therefore a reversal in the dollar prompted by stable economic data and falling expectations for another cut.

But, we'll continue to trade the facts and trade the charts. The corrective pattern from the 2006 highs continues to receive primary consideration until it's disproved. This scenario calls for the possible completion of the final impulsive-looking rise to a target area reserved for TTC members followed by a selloff back into the 600s, probably the last time these discount prices would ever be seen again. Or gold will simply continue to rise beyond the level at which this outlook will be invalidated, and this would indicate a bullish move that will see all-time highs sooner than later. Under either outcome, there's a very bright future for metals ahead in the long term, and anyone who's bought at the retests of the 50-week sma is probably already smiling.

by Joe Nicholson (oroborean)

www.tradingthecharts.com

This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts,, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual.  Check with your licensed financial advisor or broker prior to taking any action.

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