Gold & Silver Rally
By Colin Twiggs
May 19, 2009 2:30 a.m. (4:30 p.m. AET)
Spot gold broke through resistance at $920, marking the end of the two month correction, before retracing to test the new support level. Respect of support would confirm an advance to test primary resistance at $1000. Reversal below the rising (green) trendline is unlikely, but would warn of a failed signal and decline to primary support at $700 (confirmed if support at $870/$865 is penetrated).
Spot silver is consolidating between $13.50 and $14.50. Upward breakout would signal a primary up-trend, with a target of $17.00 calculated as 14.50 + [ 14.50 - 12.00 ]. And a bullish sign for gold. Reversal below $13.50, however, would signal another test of primary support at $12.00.
Rising gold and silver prices provide a long-term view of inflation. Despite the sharp fall in the consumer price index, inflation is expected to return with a vengeance as the economy recovers. The Fed is likely to err on the side of caution and lift interest rates too late, rather than too early — with a resultant surge in inflation. The rise in precious metals reflects market concern.
West Texas Crude continues in a strong primary up-trend, with a short retracement respecting the latest support level at $55. The target for the advance is $65, calculated as 55 + [ 55 - 45 ]. Reversal below the rising (green) trendline is not expected, but would warn that the up-trend is weakening.
Rising crude prices also warn of inflationary pressure, with a positive impact on the gold price for two reasons: (1) gold is an inflation hedge; and (2) Middle Eastern producers often invest surplus oil profits in gold.
The US Dollar Index broke through support at 83/82.50, to signal a primary down-trend,
before retracing to test the new resistance level.
Respect of resistance at 83 would confirm the down-trend, with a target of 79
calculated as 83 - [87 - 83].
Reversal above 83 is unlikely, but would warn of a bear trap — confirmed if the declining (red) trendline is penetrated.
The weakening dollar is another bullish sign for gold.
One of the greatest pieces of economic wisdom is to know what you do not know.
~ John Kenneth Galbraith