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Critical Junctures

Clive Maund
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 blue).

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
Clive Maund

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge, England. He lives in Chile.

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No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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