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Where Are You Going, Gold?

09/14/12 09:21:06 AM
by Koos van der Merwe

There is plenty of talk about gold going to new highs. What do the charts tell us?

Security:   XGD-T, GLDL
Position:   Hold

Gold, gold, gold. That is all you hear when the bears start talking about a collapsing market. I find it interesting that economist Nouriel Roubini is saying that he only sees the US economy falling into a recession in 2016, a far cry from his "tomorrow" of yesteryear, and remarkably a date forecast by the Kondratieff wave as a minor economic correction.

Because of this, the talk is to buy gold, with some even going so far as to clamor for a return to the gold standard. The latter obviously to prevent Ben Bernanke from printing US dollars indiscriminately, which to my way of thinking is okay as long as the inflation rate stays low.

Nevertheless, what's in store for gold? What do the charts say?

Graphic provided by: AdvancedGET.
Figure 1 is a chart of the i-Unit Gold Index trading on the Toronto Stock Exchange. The chart shows how the price has fallen from a high of $28.48 on September 9, 2011, to a low of $16.59 by May 16, 2012. The price then recovered to $21.33 by June 6 and has now formed what appears to be a descending symmetrical triangle. However, should the price rise and break above $20.62, the upper trendline, then the triangle is broken. Should the price fall to $18.09, the lower support line, and break below it, the price of XGD will fall to a target of $8.73 (28.48 - 16.59 = 11.89) (20.52 - 11.89 = 8.73). The relative strength index (RSI), which is at overbought levels, is suggesting that this is indeed a possibility.

Graphic provided by: AdvancedGET.
Figure 2 is a chart of the London gold price, which is telling us just the opposite. The London gold price appears to have formed a rising symmetrical triangle and has broken out upward, suggesting a target of $2,369.17 (1,897.03 - 1,056.38 = 830.65 + 1,538.52 = 2,369.17). The RSI is, however, at overbought levels, suggesting a possible correction down in the near future. This can occur with the target of $2,369.17 still in place.

Both charts in gold, the ETF gold index and the London gold price, are telling us two different things. The iShare Gold Index is suggesting a fall in the price, whereas the London gold price is suggesting a rise in the price.

One thing both have in common is an overbought RSI. I would therefore look for a small correction in the gold price, followed by a strong rise to its target. The date? Well, the triangle on the London gold price is suggesting December 7, 2012.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Date: 09/18/12Rank: 5Comment: 

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