If only everyday could be like last Friday in the Precious Metals markets... Did you note that Gold closed at an ALL-TIME monthly high Friday August 28? And the US Dollar at an ALL-TIME low? How sweet it is. Yet I continue to urge caution here as we enter October.
Market psychology, for what it's worth, warns that the side of the boat with the Gold Bulls and Dollar Bears is getting a little full. They must heed some caution at this time to their counter parts the Gold Bears and Dollar Bulls lest they fall out of the boat and leave dem Rat bastids at the wheel. If we could get the Bulls back into the middle of the ship, we may be able to keep control of the wheel, and steer this market higher and avoid the "big" bumps that cause the most pain.
Gold has traded in a very tight range overnight through 7AM est. in Asia, and has not followed thru, at this point, on Friday's big move higher in New York. On the hourly chart above we can see some divergence has developed between price and RSI. This type of divergence often indicates a reversal in the present market may be near. I am NOT calling a top in Gold. I am, hopefully, trying to anticipate a reaction/dip in price and a trading opportunity. AS we all know the daily charts of both Gold and Silver are seriously overbought. And though an overbought condition can persist for any length of time, it stands to reason at this time caution is the best course of action. If you look back to the left on the chart to price and RSI on the 20th and 21st of September you can see an example of price and RSI divergence that resulted in a "reaction" lower in price.
I have been urging caution for the better part of the past week. Many have probably ignored it and enjoyed the ride higher in Gold and the plunge in the Dollar. Using trailing stops to protect profits you have made in this leg up off the August lows is the most prudent way to pursue this market at this time. Too many times have we had this market move against us, and swiftly at that, where the time to decide to take profits comes and goes so quickly we end up stuck and riding the roller coaster down, and wishing we'd got off near the top of the last hill. Trailing stops allow the market to decide for you when to get out. If the market moves higher, raise your stops with the market. Technically, the market is due for a rest. Prepare for it, don't fight it. When the market comes in, you'll be taken out, and the planning for the next trade begins.
OK, so we get a reaction in Gold and Silver...where do they react to? Good question...
Close in support in Gold on the hour chart lies at 737 / 734 / 731. Looking out at the daily picture of Gold, and the upleg we're in off the August low, be reminded that gold broke out at 688. A retest of the area of the breakout 688 / 694 should not be ruled out. A 38% retracement of the present leg up in Gold would be down to 706. No moves down to these levels should be considered damaging to the Bull Market in Gold. A move down here will most likely be swift, relative to The Big Picture, and be over and in recovery by the end of October should it occur. We must always respect the enemy. They are not going to let Gold go to the Moon without a fight, and the US Government is not going to let the Dollar free-fall.
Silver, as we all know too well, can tip over and cliff dive on a whim. Though I don't anticipate a crash in Silver, a swift reaction lower can always be expected. A retest of Silver's breakout of the February 2006 high downtrend line at 13, though unnerving, should not be ruled out. Close in support for Silver on an hour chart lies at 13.30 / 13.11 / 12.94. I can not rule out a reaction below 13, but I do believe this leg up in Silver is "safe" to 12.78.
Short Term Caution Flags for Gold and Silver
By Gene Arensberg
Very short term a lot probably depends on if or when we see global government and central bank intervention in the currency markets to prop up an ailing U.S. dollar, but the longer term fundamental factors which underpin gold’s march higher (as measured in all the world’s fiat paper currencies) remain as bullish as ever and the prospects for a continuation of the rising floor for gold metal are most definitely not dependent on further weakness of the greenback (or any other brightly printed piece of paper).
For those who hold onto the mistaken notion that gold’s advance is purely a function of a weak dollar, when gold put in it’s last parabolic peak in May of 2006 the “buckster” was no where near its long-term historic support much less cutting new all time lows. If that’s not enough then one might take a look at gold as measured in euro, yen, or pounds sterling to see that the metal is consistently advancing (as defined by rising lows) in all paper. Just more in some than others.
No human can see the future and there is certainly no guarantee of any pullback for gold now, but since much of the current move is perceived by many in the market as an anti-dollar currency move, if the buck doesn’t catch a bid pretty soon this could indeed be the mother of all runaway gold breakouts. A breakout fueled in part by covering of the massive net short positioning by COMEX commercial traders and their counterparts in Asia and London. Also fueled by an increasing lack of confidence in fiat paper currencies worldwide. That’s if the dollar craters further remember.
More likely very short term though we can look for the usual harsh bull market style pullback to retest the breakout before gold powers much higher as measured in paper currencies.
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