Recent Rally in Gold:
Significant Improvement or Just a Bigger Pullback?
By Przemyslaw Radomski, CFA
Last week gold
rose to its highest level since mid-May as possible military action against
Syria prompted safe-haven buying. Itís worth noting that the yellow metal gained
over $250 an ounce from its June low of $1,180.71, but in spite of this growth
it is still down about 17 percent for the year.
to Reuters, gold gave up some gains after British lawmakers voted against any
involvement. Additionally, over the weekend President Obama stepped back from
the brink and delayed an imminent military strike against Syria to seek approval
from the U.S. Congress. Our take is that
it wonít happen anytime soon. You will find more details about this issue, and
extensive coverage of the crude oil market in our
yesterdayís Oil Update.
As the prospect of
imminent attacks on Syria receded, gold extended
losses and dropped below $1,400 an ounce on Friday. Will this drop trigger
In order to
answer this question, weíll need to
examine goldís charts to find out what the current situation in the yellow metal
is. We also take a closer look at the US Dollar Index and the Euro Index to find
out what impact they could have on future price of the yellow metal. Could they
drive gold prices lower in the near term?
todayís analysis with the US Dollar Index long-term chart (charts courtesy by
essay on gold, dollar and mining stocks on
in the long-term chart hasnít changed much recently. The breakout above the
declining support/resistance line (currently close to 79) hasnít been
invalidated and, from this perspective, the situation remains bullish.
examine the weekly chart.
fact that the USD Index declined once again last week, the medium-term support
line was not breached. Although we saw a small move below the upper support
line, even this small breakdown was quickly invalidated, which is a bullish
positive circumstances encouraged buyers to act and the dollar came back above
the 82 level.
perspective, the medium-term
uptrend is not threatened, and the
situation remains bullish. Therefore, we can expect the dollar to strengthen
further in the coming weeks. Looking at the above chart, it seems that the USD
Index has started its rally and that this rally will be fueling declines in the
precious metals market.
Now, letís check
the short-term outlook.
perspective, we see that the recent decline once again took the USD Index below
Fibonacci retracement level based on the
entire February Ė July rally.
decline, buyers managed to push the USD Index higher, and the short-term
breakdown below the Fibonacci retracement level was invalidated.
When we take a
closer look at the daily chart, we see a small
inverse head and shoulders pattern underway
(based on three August lows). As you see on the above chart, the U.S. currency
has moved higher in the recent days and broke above the 82 level, which means
that this bullish formation is confirmed.
when we factor in the cyclical turning point (which weíre seeing after a monthly
decline), the outlook here looks very bullish. In fact, from this perspective,
we see that the USD Index already started to move higher right at the
Once we know the
current situation in the US Dollar Index, letís now take a look at the Euro
On the above
chart, we see that the Euro Index attempted to move above the 200-week moving
average in the previous week, but this attempt failed for the second time, and
the breakout was invalidated.
Looking at the
above chart we clearly see that the European
currency dropped below the 61.8% Fibonacci retracement level based on the
January - July decline. At this time we also see an invalidation of the breakout
above the declining support/resistance line based on the January and June highs,
which is also a bearish factor.
Letís take a look at the gold market.
On the long-term
gold chart, we see that the yellow metal has climbed up once again and reached
the previously-broken rising support/resistance line based on the July 2005 low
and the October 2008 bottom (on an intraday basis). At this point, itís worth
noting that this area is strengthened by the 38.2% Fibonacci retracement level
based on the September 2012 - June 2013 decline. Although gold broke above this
resistance zone at the beginning of the previous week, the breakout was
invalidated in the recent days and the yellow metal dropped below $1,400 an
On Tuesday we saw another attempt to move above the resistance
levels, but gold didnít even reach them.
perspective, the medium-term
downtrend remains in place.
Now, letís take a
look at the medium-term picture to see more details.
On the above
chart, we see that gold continued its rally in the previous week and reached the
61.8% Fibonacci retracement level based on the entire April-June decline.
Although the price of gold managed to break above its June top, this breakout
was quickly invalidated.
Additionally, when we factor in the Fibonacci price projections, we see that the
recent rally from the August 7 low to the August top is similar to the upward
move seen in July. If history repeats
itself, we will
see a downward move Ė similar to the July-August decline.
point of view, it seems that the strong resistance range based on the June top
and the 61.8% Fibonacci retracement level
will keep the rally
in check as it further strengthens the resistance created by the rising
long-term line marked in red on the previous (long-term) chart.
up, in the recent days the
Euro Index has declined back below the declining red support line, which makes
the outlook for the USD Index even more bullish. These
circumstances will likely have bearish implications for the precious metals
sector. With a bullish outlook in place for the dollar, it doesnít seem likely
that gold will have enough strength to move above the previously mentioned
resistance levels. Therefore, despite the recent show of strength, the
medium-term outlook for gold remains bearish.
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Thank you for reading.
Have a great and profitable week!
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Seeing is believing.
All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
respective essays at the time of writing. Although the information provided
above is based on careful research and sources that are believed to be accurate,
Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
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are neither an offer nor a recommendation to purchase or sell any securities.
Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw
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