Considering the chart above, gold appears overbought and prime for a drop. The relative strength index is at 72.68 and above the 70 level which would normally be a sell for us. Although we always load up heavily on gold when the RSI is on or below 30, we never sell when the RSI hits 70 during major rallies.
Why? Well, simply because when gold decides to go on a run it generally disobeys the RSI overbought reading as it simply continues higher.
A textbook case of this is during that run to $1225 in late 2009, the RSI was well above 70 in early November while gold was just $1100. Selling in early November because of the RSI reading would have missed a whole $125 move upwards. And shorting the yellow metal at that time would’ve proved fatal. With this example fresh in our memories, we will not sell gold when the RSI gives us a sell signal during major rallies, and the current RSI reading 72.68 does not deter us from being long gold.
Prior to breaking the $1033 major resistance with a follow through to over $1200, gold broke the $720 mark which was previously another major resistance. From $720 gold subsequently rallied to $1033, a move of over 40%. Gold made another 40% move when it surged through the $500 barrier to $720.
One may infer from these observations that we are presently likely to get another 40% move.
Considering the breakage of the $1033 resistance area, this gives us a gold price for the present move of $1446.20. This is a rough estimate but it would not be unreasonable to expect gold prices to move up towards $1400/ounce during this major rally, and then when one factors in the possibility that these large moves could become even larger than 40% as the gold bull market progresses and becomes more volatile, prices higher than $1400 appear possible.
We normally look to the ultimate inverse gold price indicator, the US dollar, for more clues on what gold prices might do and when. But since gold and the USD have recently been moving up together, this analysis technique isn’t too helpful. However, investors should not lose faith in the gold bull market simply because this inverse relationship hasn’t worked recently.
One should keep in mind that in the last gold bull market, gold and the US dollar moved up together, so it is likely that this could happen again. Also, the fact that gold is rallying in spite of USD gains is a sign of great strength in the yellow metal.
We think that in the long term, as the USD resumes its bear market down trend, gold prices will continue to move higher. In the shorter term we believe that if the Euro should find its footing and begin to rise, as a result of perceived improvement in the sovereign debt issues in Europe, the USD will drop back slightly and gold price will likely take a hit. For now, gold has become a safe haven investment sparked by unstable conditions in Europe.
An improvement in European debt conditions would likely take away some of the premium presently given to gold. However, if this should occur we expect gold’s price decline to only be temporary, since USD weakness will ultimately drive gold prices higher. Essentially this could work out as a win-win situation for gold, albeit with the second win scenario of EURO improvement slightly delaying gold’s rise.
The bottom line is that the major rally beginning with the break out above the previous all time high of $1033 is not over yet. We will likely see $1300 plus very soon. And, we believe that gold did not recently break above its December 2009 high of $1225 just to rally to $1249. There is more to come!
As we are now trading at all time highs, we are in unchartered waters. Volatility should be expected, and in large doses. Short term, gold could drop back to $1185. Ideally, however, we would like prices to consolidate at these current levels so that $1225 will become a support level and a base for the next move up.
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