You may recall that in the last update posted on the 10th we called for a drop. As you won’t need reminding, we got it. On its 7-month chart we can see that gold sliced straight through support at its early January bull hammer low and then dropped steeply into last Wednesday – Thursday, where a high volume selling climax occurred at a parallel trendline target. Gold is now quite deeply oversold, with many oscillators at extreme readings. This 7-month chart cannot provide the big picture of what is going on, only recent detail, so let’s now move on to the longer-term charts.
The 2-year chart for gold is very useful as it enables us to examine the large trading range that has formed from the August – September 2011 highs in detail. After the initial drop from those highs we can see that gold settled into a horizontal trading range between clearly defined support and resistance at its upper and lower boundaries. Since the boundaries of this trading range have been tested on several occasions in both directions, resulting in significant reversals, they are clearly are great technical importance, and a breakout from this range will thus be an important technical event that can be expected to lead to a major move. For a variety of compelling reasons which we will soon come to, gold is expected to reverse to the upside from its current position near the lower boundary of the trading range and go on to break out upside from it. Here we should note that although a powerful new uptrend is expected to develop soon from here, we should not be surprised to see some backing and filling over the short to medium-term above the support, that may involve gold dropping a little further to about $1530. This is hardly surprising given that many sector participants are shell-shocked after the latest drop, so that some are in the frame of mind where they will sell for what they can get. Failure of the support at $1500 is viewed as highly unlikely given the current technical readings – if it happened it would have dire implications for just about everything, as it would imply that another 2008 style deflationary implosion was on the horizon, and it is considered unlikely that the money pumpers will permit that, although one day they may no longer have any choice in the matter. Now let’s look at the really big picture on gold’s long-term chart.
On the 7-year chart we can see that after its latest drop gold has arrived not just at, or close to, the lower boundary of its recent large trading range, but also at a parallel trendline target. It is now in the zone that we had earlier defined as being an excellent point to buy ahead of the start of the next major uptrend. This is an excellent point for it to turn up to start the breakout drive marking the birth of the next major uptrend, and as we will now see, all the technical indications are that it is about to do just that.
The latest COT chart for gold is at its most bullish for over a year, and this chart, which is up to date as of last Tuesday’s close, does not even factor in Wednesday’s big drop, so readings now can be assumed to be even more favorable. This is by far the most reliable indicator in our tool bag – whenever we have gone against it we have lived to regret it - and it was partly the then still bearish silver COT which enabled us to predict the latest plunge in both gold and silver before it started. After this drop Commercial short and Large Spec long positions (for Commercial read Smart and for Large Spec read dumb) have fallen dramatically and this COT chart is now viewed as strongly bullish for gold.
Now we move on to look at a range of sentiment indicators which provide a raft of evidence that gold is either at or very close to a major bottom. We start with the Hulbert Gold Sentiment Index, which shows that sentiment is at rock bottom, there is only room for it to drop a whisker more. This indicator shows that everybody and all their friends and relatives are bearish on gold, which means that there is almost nobody left to turn bearish on the friendless metal. So guess what happens to the price when people start changing their minds? – that’s it – you’ve got it!
The gold public opinion index is at even more extreme low levels, being at its lowest reading by a country mile since at least the end of 2008. This demonstrates that the sheep are all up at one end of the field, the bearish end – and we all know what happens to them.
The Rydex have reduced their Precious Metal holdings to a very low level, as we can see on the following chart, which also shows that they are dumb as a door stopper when it comes to timing Precious Metals purchases. We can therefore take their low interest at this time to be another positive indication.
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