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The Gold Forecast: To QE3 and Beyond: Gold Begins a Major Rally

Friday October 05, 2012 09:49

Gold traders and investors spent the better part of September 2011 to August 2012 experiencing what is best characterized as a long corrective winter.
The parabolic rise in gold prices led to a new record high above $1900. Then we watched as prices vacillated between $1800 and $1500 per ounce for the better part of the last 12 months. Patience was not only a virtue, but was an absolute necessity for any investor/trader awaiting concrete confirmation of a conclusion to this protracted correction. Gold bulls were rewarded for their patience as we saw the first real signs that the correction had come to an end in August of this year.

Chart 1 (below) identifies compelling technical evidence that as this market first broke above 1627 per ounce, a major rally would follow. The chart is a weekly chart in a Japanese average format. It contains two Fibonacci retracements that clearly define key levels of support and resistance. The longer of the two Fibonacci retracements begins in July 2009 with gold at $880 per ounce, extending to the all-time record price of $1920 per ounce. When looked at within these confines we can identify the 38% retracement level of this major, sustained, multi-year rally. The 38% retracement level at approximately $1525 per ounce provided the technical trader with valid insight as to the logical place to look for major price support. Although it correctly identified a valid support area, it would take the formation of a triple bottom before gold prices would move strongly off those price lows.

This last correction contained price movements that can be characterized as a descending top (a series of lower highs) and a flat bottom. This price activity could then be easily identified as a triangle correction in an uptrend. This type of corrective activity, which was identified by R.N. Elliott, is a rare but most accurate corrective pattern. However, the pattern in question deviated from the textbook example; the last wave traded within a very narrowly defined range of 1520 to roughly 1624 across an extended period of time.

The second Fibonacci retracement specifically identified a major resistance level at approximately 1627 per ounce, which was a 38% retracement of this shorter Fibonacci retracement sequence. Also, two prior tops could be identified at this price. These were key factors in identifying a logical and relevant resistance that prices would need to break above. This would signal an end to the sideways trading activity then present in the market. In fact, we identified this level and looked for a major breakout once prices traded above that target.

In mid-August we advised our viewers of “Chart This” (a Kitco News production) to watch for a move above 1635 to signal a bullish breakout. We presented the technical data, which pointed to a forthcoming breakout. We based our signal on the data and observation presented in this commentary.

Since the break above 1635 gold has moved within a few dollars of 1800 intraday. Currently above 1790, the average chart exhibits a strong trend that could continue if gold can close above 1800.  

There are three conditions we look for to identify the strength of an uptrend with Japanese average charts: color, wick and size. As you can see from the chart above the candles are (1) green in color, (2) lack lower wicks, and (3) are larger candles than average (body size). As you can see from the chart above the candles are green in color (1) lack lower wicks (2) and are larger candles (3) than average (body size). This not only signaled a conclusion to the correction in prices, but more importantly it signaled the beginning of a major fifth wave that should take prices well beyond our former record high of 1920, and conclude with a new price high in gold.

So what does this technical information have to do with QE3? A hybrid market analyst begins with the fundamental data. The announcement made by the U.S. Federal reserve to begin an open ended stimulus program (QE3) set into motion a series of possible forces, which could put substantial pressure on the U.S. dollar, which in turn will be bullish for gold. Add to that the European Central Bank's stimulus program announcement and the recent boost in physical gold purchases by many sovereign governments' central banks and you have outside forces in place that could push gold to a new record high. 

Elliot wave principle has identified the start of a major 5th wave, which in theory says that this major rally will take gold to a new contract high. The fact that both fundamental and technical data are pointing to the same outcome increases the probability that this outcome will unfold over the next 4 to 6 months.

The chart below (chart 2) uses Elliot wave and Fibonacci extensions to forecast the price potential of a new record top. To learn more about the techniques presented in this commentary go to Thegoldforecast.com and click on the Elliot Wave Video link.

Gary Wagner

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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