Precious Metals: Quick Consolidation or Serious Breakdown?

In my previous article, Will Precious Metals Reach New Highs? Ask the Dollar, I wrote the following:
 

"There are several factors that make me think we may move a little higher -- above 77 but not higher than the 78 level.

"The declining trend line...provides a solid resistance right now, and it hasn’t been reached yet. Moreover, the breakdown below December 2009 low hasn’t been verified yet, and a brief move higher from here would verify it."

This is precisely what we’ve seen this week -- USD moved slightly higher, yet gold and silver managed to close this week a little higher as well. This type of action during consolidations (rising despite fairly negative influence from other markets) signals the strength of the precious metals.

Speaking of consolidations, let’s turn to the gold chart (charts courtesy of StockCharts.com) and see what it did this week, to estimate what is likely to take place next.

Gold

The yellow metal is currently hovering at the $1,000 level. Since this is such important number from a long-term point of view, I believe a weekly chart would be particularly useful to analyze the situation:


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Once we take a look at gold from this perspective, it becomes noticeable that in terms of weekly closes, gold has already broken above the previous highs and is now verifying this breakout. So far it’s been successful, as the price closed below the $1,000 level only last week, but bounced higher this week.

Moreover, on this chart you can see the flag formation marked with thin, dashed lines. This pattern suggests continuation of the previous trend, and that the following rally will be at least as large as the preceding move. This would imply gold above $1,050 -- high enough to convince many people that $1,000 has been taken out for good.


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From a short-term point of view, it seems that the price of gold may correct a bit before a big rally materializes. As always, the Fibonacci retracement levels provide us with valuable support areas, which are strengthened by several other support lines. Most of the support levels cross at the area marked with red ellipse, so it’s very likely to stop the decline.

This would more or less correspond to the ABC correction pattern, which is often seen in the metals market -- a move lower would be the C part. Taking the long-term charts into account, it seems that the upper part of the ellipse and the 50% Fibonacci retracement level (at 95.69 in the GLD ETF) are most likely to stop the decline, as they also correspond to the rising long-term support line (visible on the weekly chart.)

Gold Stocks


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