Will $715 Be a Difficult Hurdle?

When I wrote my April 16th alert, gold was still trading below $600 per ounce ($19.29 per goldgram). I stated that "$600 is not a level that represents historical significance...So my expectation is that $600 will be hurdled before too long." As it turned out, gold closed above $600 the next day and has remained - so far at least - above that level.

In that April 16th alert I presented the following chart, which I have updated through Friday's close.

Having climbed to and slightly above $715, last week gold corrected, closing in London on Friday at $654.50, down $65.10 from the $719.60 close the week before. That is the largest one-week decline since March 14, 1980, when gold was sliding lower after reaching its all-time record high just two months before. In percentage terms, last week's -9.0% drop was the largest since March 4th, 1983.

That we had to reach so far back into history to find larger declines suggests that maybe $715 may prove to be a difficult hurdle. This conclusion may be strengthened by another comment from my April 16th alert: "Gold hurdled over barriers 1-3, and barrier #4 waits above at $715." In other words, I identified the $715 level as a point which could represent significant overhead resistance, comparing it to three previous formidable barriers noted on the chart above. These were $325, $410 and $500. So the question is, will $715 be a difficult hurdle?

To answer this question, I again refer to my April 16th alert. In it I identified three "fundamental factors that are driving gold higher" - inflation, government deficits and protectionism. None of these problems have been solved over the past month.

Indeed, recent reports show that inflation is getting worse. While government revenue has been climbing, so too have government expenditures climbed so the deficit is not shrinking. Lastly, having just returned from two trips to Asia and the Middle East, I can confirm that U.S. protectionism is worrying to overseas holders of dollars. Thus, all three of these points each remain as a good reason to sell dollars and buy gold. It is therefore my conclusion that $715 will not be a difficult hurdle.

Meanwhile, the following chart indicates that silver may start outperforming gold once again.

Note how the ratio has climbed back to the point at which it broke-out from the rising trend channel. Pull-backs to break-out points are common events.

So in summary, the bull market in the precious metals has not ended. Gold simply took a breather when it touched resistance at $715. The same thing happened in silver. Corrections like last week's are inevitable events in bull markets, and while the swiftness and depth of the correction may at first blush be worrying, there is more reason to worry about the outlook for the dollar than for the prospects for gold and silver.

Published by GoldMoney
Copyright © 2006. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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