Probabilities Now Favor a Rally

On May 11, 2006, gold and silver reached multi-decade high prices of $719.80 and $14.846 respectively. It's now been more than one year since those highs were reached, but gold and silver have not been wasting time. Both metals have been consolidating the price gains they achieved when those multi-decade highs were reached, as we can see on the following charts.

Turning first to the gold chart, I've drawn the major uptrend channel (the parallel purple lines) that began when gold hurdled above resistance at $440 in August 2005 after the Gold Rush 21 conference sponsored by GATA. The top of this uptrend channel is marked by gold's peak last May, after which gold consolidated within a pennant formation. It broke out of the pennant late last year, and ever since gold has been climbing along the bottom line of the uptrend channel.

Silver's pattern is different from gold, and to me appears much stronger from a technical perspective. I've drawn two identical pennant formations on the above chart. I expect history to repeat, with silver breaking out of this second pennant just like it did from the first one. If history does repeat with another rally with a similar percentage gain, the breakout from this second pennant would put silver over $20.

There have been several important developments over the past few weeks. Central bank gold dishoarding has received widespread attention, which always casts a negative pall on the market. Consequently, sentiment toward gold has fallen, which of course is bullish. The fundamental factors driving gold higher have not changed; only people's attitudes and outlooks have changed.

With sentiment as low as it is at present, it is reasonable to assume that buying power will now be greater than selling pressure. Indeed, gold's $16 gain this past week is evidence that buying power has gained the upper hand.

Also, not only has gold held support at the bottom line of its uptrend channel, it remains above its 200-day moving average, which is also climbing higher. These are important signs of technical strength, as are the recent changes in Comex open interest.

The big trend-following funds are once again short, setting them up again to have their pockets picked by the gold cartel. As gold climbs from here, these funds will again get 'whipsawed', incurring losses as they reverse their position by covering shorts and going long. Their activity should provide enough buying power to take gold once again up to $700.

Maybe this time gold will finally break through $700 into a new multi-decade high. When we finally clear that hurdle, expect silver to be well above $15 on its way to a much higher price.

The precious metal bull market has been resting for the past year, consolidating and building support. It's now time for gold and silver to resume their uptrends, and the big jump this past week is a good indication that both metals are starting to do that. Continue to focus on much higher prices for both gold and silver as we move toward the end of the year.

Published by GoldMoney
Copyright © 2007. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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