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Technical observations of

Bob Hoye
Institutional Advisors
January 28, 2005

I continue to wait for gold to generate a short term 'buy' signal by either declining enough to produce an oversold CCI(8) reading or staging a breakout of a trailing 20-day high. The other ingredient that is unnecessary following the Economic Confidence Cycle, but would be comforting to see would be a bullish divergence in the XAU or HUI over the bullion price.

Following this 'buy signal', we could see the curiosity of gold and the U.S. dollar recovering together.

US Dollar and Gold Poised for Joint Advance

The US Dollar Index has accomplished a pattern that I term an "isolated low". This is established when a market makes an expanding pattern at the end of a decline. Ideally, it occurs when the market has been in a well defined downtrend and makes a low that generates an RSI reading below 35 (Point 1), rallies to produce an interim swing high (Point 2) and then declines to a new low (Point 3). From there, prices rally in an uninterrupted motion to exceed the previous Point 2 interim high. This pattern was in place as of the week of January 7th (Point 4) and is the 12th such daily or weekly occurrence since 1985. The ensuing downside corrective low (Point 5) needed to hold above Point 1 which is deemed to be a viable spot for controlling risk.

From Point 5, it is likely that we will see the US Dollar and Gold rally together. Optimally, the upside pairing lasts for 5 to 6 weeks.

Looking down the road a few months, if the Dollar manages to achieve a weekly RSI(14) reading over 61 then the probability of a multi-month rally beyond that is very likely. At this condition, the chances of gold continuing higher would be diminished. However, if the Dollar peters out with a mediocre RSI reading then the gold market should really spring to life.

US Dollar, RSI(14) and Gold - 1995 to 2005
Isolated lows circled in Red
Upside pairing with gold in grey

US Dollar, RSI(14) and Gold - 1985 to 1995

Bob Hoye
Institutional Advisors


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