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Gold firming base

By Thomas Verhaest              Printer Friendly Version

June 07, 2004

www.tmtfinancial.be

The gold price has been trying to gain back some of the fierce losses incurred during the April sell-off. Before this sell-off, complacency was the highest and everybody ‘knew’ the Dollar was heading lower and gold was making multi-year highs. As a contrarian, that’s the signal to get out, or at least re-evaluate the mid-term view. At that time, I posted a newsletter calling for a $430 top for the gold price and warning the price had to go down to $380 by the end of April. At the time, I thought I was making bold predictions and that $390 would probably be the bottom, but that $380 was in the cards. Well, as all of you are undoubtedly painfully aware of, the gold price went down to $371 intra-day, but held $375 on a closing basis.

As you can see on the chart below, $375 is a crucial level in the long-term performance chart for gold. When we analyse the gold price based on the Elliott Wave theory, we can clearly establish a 5-wave up formation from the April 2003 low of about $320. Making the Fibonacci retracements between the low of $320 and the high of $430; $375 comes in as the 50% retracement level. It was absolutely crucial this level held, as it was also the 65-week moving average which seems to provide support for the long-term trend in the gold price (the last correction, back in 2003, also bounced back on that moving average). $375 was also the top of the first wave up in the 5-wave cycle of last year. This means that the resistance of the first wave has now become support for the corrective waves. This again is crucial in view of the longer-term positive picture for the gold price.

Since hitting the triple resistance at $375, the gold price has made a nice move back up to the $390-$400 area, which provides a natural resistance level. It’s here that it becomes tricky. We now have two scenarios: Either gold breaks through the $400-barrier and goes on to test the January and April highs, or gold fails the $400-barrier and goes down to test the $375 resistance level once more.

All the signs point to a break of the $400-level however. The Dollar has clearly resumed its downtrend since breaking the 1.22 support level against the Euro. The Dollar is currently trading around 1.232 and making its way to the 1.25-level. Since the inverse relation between gold and the Dollar is currently stronger than ever, this poses good prospects for gold. Also intrinsically, the basics are looking better than ever for gold. Demand from the Middle East has skyrocketed due to the higher oil prices. In China and India, the demand is still strongly on the increase. Furthermore, with inflation ever more manifest in all parts of the economy, more and more money should be allocated towards gold as the perfect hedge against inflation.

The technical signs the $400-level is bound to be broken is the fact that last week, the $388-level proved to be enough resistance on a closing basis. Intra day, gold went to $385 after the jobs numbers came out, but quickly moved back to rally over the $390 end of day. This $388-level is the 61.8% Fibonacci level. We now have a situation where gold has retraced and successfully tested the 50% retracement-level, moved back up to natural resistance and back down to successfully test a higher Fibonacci support level. To complete this picture, the $400-level should now be taken out at the next attempt.

Once the $400-barrier is broken, I expect gold to rally to $412-$415 pretty quickly. That level provides resistance from the upward trend line of the first five up-waves. This resistance will probably make gold pull back to test the $400-level, and if that holds, gold should move on to new highs pretty soon. Those who believe in these prospects for gold can get in now at fairly cheap levels, others can wait until the $400-barrier is broken for extra certainty. We will then have entered a new five wave up cycle, which will take gold to levels not yet predictable. A lot will still depend on the war on terror, the oil price, the US economy ands.

For now, the spin-doctors on Wall Street and in Washington are still talking this market up to protect their own precious little behinds. The basics however are getting ever weaker, even with jobs growth at 300.000 a month. With inflation rampant, personal bankruptcy skyrocketing, record debts and deficits, an economy on steroids and 50-year low interest rates bound to go up; there is not much room for improvement. With gold firming its base for a new rally to higher highs and the indices firming their top for a slide to new lows, gold is again the asset to be in for the next few months at least.


Kind regards;

Thomas Verhaest*

*****

*The previous market analysis is based on information the writer considers trustworthy. Personal opinions are based on a thorough investigation of the material. Success however cannot be guaranteed. The writer can therefore not be held responsible for any losses incurred.


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