What will gold do next?

After making a new all-time high in September 2011 at $1,923.70, gold bounced around between $1,525 and $1,800, touching both levels three times. The question is, is the consolidation period over, is gold still in an uptrend? and what will gold do next?

Is the consolidation over?

The short answer is yes. Gold is now ready to resume its uptrend.

After making a new (nominal) all-time high on 6 September 2011 at $1,923.70, gold began a much needed period of consolidation. Having made a low of $1,547.60 on 28 June gold began a fresh assault on the blue downtrend line that has contained the yellow metal for almost a year.

As the chart below shows, gold finally broke through the downtrend line in late August (red circle). It then made a powerful run all the way to $1,798.10 where it ran into an area of overhead resistance (yellow box).

A 20 month chart of Gold

A 20 month chart of Gold

Chart courtesy of stockcharts.com

Is gold still in an uptrend?

As the trend channel chart below shows, despite its recent pullback gold remains in an uptrend. The green lines show the intermediate-term trend, while the blue lines show the shorter-term trend, and both are currently positive.

Although gold is still some distance above the lower end of the blue uptrend channel, the stochastics indicate that short-term momentum is currently to the downside (red circle). If gold continues to fall it should find support at the lower blue line at around $1,700, or at the 50-day moving average which is currently at $1,715.

A 1 year chart of Gold

A 1 year chart of Gold

Chart courtesy of stockcharts.com

The US dollar is looking vulnerable

The price of gold is heavily influenced by the price of the US dollar. That’s because the price of gold (and other commodities) is quoted in US dollars, since the dollar is the world reserve currency.

As the chart of the US dollar index below shows, the US dollar has recently broken down out of its short-term uptrend, and is now testing the support of the intermediate-term trend channel. Momentum for the greenback is also to the downside.

A 1 year chart of the US Dollar Index

us dollar trend channels - 30 Oct 2012

Chart courtesy of stockcharts.com

If the dollar fails to find support at around $79 it could lead to a much more severe break to the downside, providing a positive backdrop for gold.

What will gold do next?

Gold is now consolidating its recent gains, and it needs to break above the $1,805 area before it can continue its advance. However if gold can break through $1,805 with conviction, and establish a close above that level on the weekly chart, then it’s likely that it will move quickly higher towards the $1,900 milestone.

Once gold clears $1,923.70 it will begin its assault on our $2,400 target.

The bottom line

Despite its recent pullback the outlook for gold remains bullish. From a technical perspective we should expect further consolidation from the yellow metal before it resumes its uptrend.

From a fundamental perspective I would argue that gold has scarcely looked better. We see central banks ramping up their efforts to avert a global slowdown with more money printing, real interest rates around much of the world are still negative, central banks are still buying gold, and inflation remains a very real threat. Not to mention the Basel III rule change that we wrote about last week which is also potentially very bullish for gold.

The big picture is that gold is still in a powerful multi-decade bull market uptrend and I see no signs that it’s coming to an end.

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