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VIDEOCan Gold Continue Ride Up or Is Correction Inevitable?
By
Przemyslaw Radomski
Sep 07, 2010 8:10 am
Volume levels, RSI level, and a study of similar previous trends all point toward a correction in the very near term.
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With these dramatic words begins a eulogy of the European Union in a Washington Post article.
The problem isn’t just economic, but more political; a re-nationalization of political life with countries reclaiming the sovereignty they once willingly ceded for the collective eurozone ideal.
Economically, at least on the surface, things seem to be looking up for Europe. But keep in mind that economies can be like icebergs with lethal, unseen parts below the surface, like one common currency for very different economies. I fear that the eurozone will arrive at the same juncture again in about three years when they must pay interest on their current debt plus the 1 trillion in bailout dollars, and repay the maturing debt. Given that governments are reluctant to take the high road now, the odds are small that they’ll do the right thing in three years, hence outright default and debt restructuring. Then the debt bubble will be that much larger, the economy will be in worse shape, and the pain of default and austerity will be much higher than today's.
Although there’s little doubt at my firm that three years from now we’ll be glad that we invested in gold, right now we’re more interested in what will happen in the near-term future since gold has enjoyed quite a ride up. Let’s take a look at the long-term gold chart (charts courtesy of StockCharts.com).
Gold has rallied but the long-term rising resistance line appears to continue to be holding gold’s rally in check. The current trend is very similar to what we saw in May 2009. We’d like to remind you that at that time the subsequent decline was close to 5%. Notice at the top of the chart the current RSI level of 70. Many times in the past such a level has coincided with local tops, most recently May 2010, as well as in December, October, September, June, and February 2009.
This week’s short-term chart caused us to revise our downside target area with specific numbers for the correction as a result of the strength shown by precious metals recently. Meanwhile, please note how straight the rally has been -- without any serious correction. While this isn’t a technical indication by itself, taking this alone into account should make you consider the correction as likely, even before analyzing anything else. Could the buying power be drying up right now? The analysis of volume supports this view. Moreover, let's take a look at the size of the rally compared to the previous one -- the top materialized above the 61.8% Fibonacci retracement level, but below the previous top.
A correction still appears inevitable based on analysis using our normal charts and tools as well as incorporating new methods. Volume levels, RSI level, and a study of similar previous trends all point toward a correction in the very near-term. Aside from these dependable indicators, the size of the current rally alone should make you cautious regarding any further gains.
While gold has been rallying lately, silver has really soared, which might cause some investors to question the above views. Let's take a look at the silver chart for details.
No positions in stocks mentioned.
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