Gold and Silver updates
9 May, 2005
Gold is now at a critical juncture,
perched right on its long-term uptrend line, following a down
day on Friday, and although we must assume that the uptrend remains
intact until broken, it would nevertheless be wise for us to
attempt to figure out ahead of time what will happen should it
go on to break down from the uptrend.
The long-term uptrend in gold
is intimately related to the long-term downtrend in the dollar,
and will remain so until we see the long-awaited breakout against
other major currencies, such as the Euro and Swiss Franc. Therefore,
we can expect to see direct correlations between the gold and
the US dollar charts, which is, of course, blatantly obvious.
It should therefore come as no surprise that the dollar is also
at a critical juncture. So we will start by looking at the long-term
gold chart and comparing it with the long-term dollar chart.
The 4-year gold chart shows
gold right on its long-term uptrend line and in the late stages
of a symmetrical triangle pattern that has been developing since
early December, so that a breakout, one way or the other, must
occur before much longer. This is a critical juncture not just
because it is right on the long-term uptrend line, but because
it is also in an area of very strong support, arising from the
trading beneath the double-top that formed in 2004, and from
its rising 200-day moving average. The rally in the fall of 2004
failed to reach the upper return line of the long-term uptrend
channel, and thus signalled a POSSIBLE future change in trend,
which has not until now been taken seriously, because this advance
did rise to reach the inner return line of the channel, shown
on the chart, and thus it was reasonable to assume that it would
subsequently push on higher towards the upper line, this has
not so far occurred, and downside risk is now increasing.
So where will gold end up over
the short to medium-term if the long-term uptrend fails in the
near future? The answer can be extrapolated by drawing a trendline
across the 2004 highs, and then drawing a parallel return line
beneath. This gives us a target in the $400 area, which is where
we would expect significant "round number" support
to come into play. Would such a breakdown mean the end of the
bull market in gold? - no, it wouldn't, it would signal a larger
order correction to the entire uptrend to date. Such a correction
may, of course, take the price down to the major support shown
on the chart in the $370 area, possible after a strong bounce
from the support in the $400 area.
In the event that gold's long-term
uptrend breaks down, what will be the effect on gold stocks?
We can expect a sharp capitulative selloff taking the HUI index
swiftly down to its major support at 150, at which point it will
be necessary to review the situation.
The strong correlation between
the long-term gold and US dollar charts is glaringly obvious
when the 2 charts are placed together. They are both at a critical
juncture relative to their long-term uptrends, and even have
similar inner return lines, and, as with the gold chart, we have
drawn in an additional trendline across the 2004 lows and then
added a parallel return line above that indicates where a rally
following a breakout from the downtrend is likely to end up,
and it is actually not very far above the current level, and
most notably in an area of strong resistance, which should cap
the advance, at least for a while.
The 2-year chart shows recent
action in more detail, including the symmetrical triangle that
has formed since December. On this chart we can also see the
first target area for a decline that would be expected to be
occasioned by failure of the long-term uptrend (shown in light
The 6-month dollar chart shows
the battleground area where the dollar is taking on the heavy
resistance in the 85 area, just beneath its falling 200-day moving
average, whilst finding support in the vicinity of its rising
50-day moving average. This situation is expected to trigger
a decisive breakout one way or the other before much longer.
To end on a positive note,
we must assume that the long-term uptrend in gold (and downtrend
in the dollar) is still operative until we see a clear and decisive
failure. Given the propensity of the market to fool and wrong-foot
the majority it would be typical behaviour for an INTRADAY breakdown
to occur, causing widespread panic, only for the market to close
back up above the trendline.
The outlook for silver remains
much as described in the last update. It remains down on the
support of its long-term uptrend line, which also happens to
be the lower line of a large symmetrical triangle. A breakout
from this large triangular trading range is now drawing closer.
Like gold, its fate at this juncture depends largely on the course
of the dollar - specifically whether the dollar can succeed in
breaking out of its long-term downtrend, or whether it will be
overcome by the heavy resistance at and above the current level,
and succumb to renewed decline. Should silver break down below
its long-term uptrend line it is expected to be synchronous with
a gold breakdown/dollar breakout to the upside. The dollar/gold
interaction and outlook, which has a pivotal bearing on the outlook
for silver at this juncture, is discussed in detail in the Gold
Market update, above.
7 May, 2005
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
Visit his subscription website at clivemaund.com. [You can subscribe
No responsibility can be accepted for losses that may result as
a consequence of trading on the basis of this analysis.
Copyright ©2003-2011 CliveMaund.
All Rights Reserved.
Charts courtesy of StockCharts.com.