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Precious Metals Becoming a Risky Business

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Unpredictable dollar makes any move higher uncertain.

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The evil nemesis in the 1964 James Bond movie of the same name is international bullion dealer Auric Goldfinger, who stockpiles vast quantities of gold.

Bond investigates him at the request of the Bank of England, and soon uncovers a dastardly plan by Goldfinger and Chinese agents to bring economic chaos to the West by irradiating the US gold supply at Fort Knox with an atomic device, rendering it useless for 58 years. This would greatly increase the value of Goldfinger's own gold supply and give the Chinese increased power. Bond dodges steel-rimmed killer hats, overcomes Goldfinger's sexy pilot, and saves the day.

Goldfinger could have done very well if he'd just waited patiently for 1999, which is when some of Europe's central banks began selling their gold reserves under the first Central Bank Gold Agreement -- 3,800 tons of it. We know in hindsight that they began selling at the bottom of the market, around $252 an ounce. Since then, the price of gold has almost quadrupled. An astute evildoer like Goldfinger could have made a fortune just by snapping up all those ingots.

This Friday, the European Central Bank confirmed signing another renewal of the 5-year agreement to replace the existing pact. They reduced the annual limit to 400 tons, down 25% from the previous level. In the current economic environment, the central banks are generally not selling; rather, they're holding on to their gold reserves -- a move that could further increase sentiment to the yellow metal, and thus positively influence prices in the long term.

Data released by global bullion analysts showed that the banks haven't disposed of much gold in the first half of the year under the terms of the current Central Bank Gold Agreement. Compared to last year, the banks' sale of gold in the first 6 months of the year was down by around 73% at 39 tons, the lowest level since 1994.

With even governments becoming more bullish on gold (taking actions, not words into account), the odds that the price of gold will eventually go much above the $1,000 level are very high. However, the timing of when this will happen is a different matter. In order to estimate the most probable outcome as far as timing is concerned, we need to refer to the charts (courtesy of stockcharts.com).

Let's begin with gold.

Gold



Gold moved higher at the beginning of the week, but corrected these gains at week's end, dented by a stronger dollar. Price stopped at the previous local high, which also corresponds to the 38.2% Fibonacci retracement level of the previous downswing. Normally, one might expect this level to prove a solid resistance. However, this time, gold has already broken above it and closed above 3 consecutive days, thus confirming the breakout. The resistance level has turned into support.
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No positions in stocks mentioned.
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