Gold Market Update
Not quite ready for the burning of the books
28 October, 2004
The dollar crashed support at 87 as predicted and has plunged
rapidly to the next support level. This development was expected
to result in a gold breakout above the key $430 resistance level,
but it did not. Gold did, however, push up against the resistance
on Monday before backing off. While acknowledging that the precipitous
nature of the dollar decline means that the current support level
may not hold for long, it would be wise, in view of the clear
support at this level and the short term oversold condition of
the dollar, to expect some kind of minor rally or holding pattern
possibly lasting some weeks before the dollar breaks lower again.
This being so we should not be surprised to see gold back off
a little and consolidate from here before it challenges the $430
level once again.
Gold's apparent lacklustre
performance as the dollar plunged is viewed as more of a reflection
of the importance of the $430 resistance level than an indication
of intrinsic weakness; the fact that it stopped right at the
January and April highs synchronises with the dollar plunging
to its January and February lows. The implication of this is
obvious - gold can be expected to break out above $430 when the
dollar breaks down below its lows of early this year. The $430
level is such a crucial milestone for gold that when it breaks
above it, a powerful advance is to be expected. This will be
the point at which "the burning of the books" can be
expected, namely the bearish Elliot wavers burning all their
gold chart folders.
So, to summarize, the dollar,
having broken 87 on the index, has fallen to hit its first downside
target. It is on an important support level and short-term oversold,
and therefore likely to either rally modestly or remain in a
narrow trading range, perhaps for several weeks as the oversold
condition unwinds. The precipitous nature of the decline indicates
that it is unlikely to be long before it breaks lower again -
and next time gold is expected to break above $430 and advance
Maund is an English technical analyst, holding a diploma from
the Society of Technical Analysts, Cambridge and living
in southern Bavaria, Germany where he trades US markets.
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