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Bullish Outlook for Gold Still Valid Despite Recent Pause in Rally


It appears that the outlook for gold continues to be bullish for the short and long term.

This week's events are like theater, with shades of a Greek tragedy. In a play the audience knows that if there is a gun in the first act, it will be fired in the third. Now we're in the second act and so far, the plot is predictable. The script was written back in 2008 when the subprime crisis hit.

This week one of the actors, a wily 75-year-old politician who, in an opera-like plot survived allegations of sex and corruption, finally had to get off the stage. Italian Premier Silvio Berlusconi pledged to step down after the Italian Parliament will approve austerity measures meant to stave off the nightmare scene of a bailout. Italy's borrowing costs rose further toward unsustainable levels on Wednesday passing the key 7% level brushing up against levels that, once crossed by Greece, Portugal and Ireland, led to a quick erosion of confidence that triggered international bailouts. Italy has amassed more than $2.6 trillion in debt and its bonds are among the most widely held in the world. Any hint in this theatrical plot that they might not be worth their promised value could shatter investor confidence.

Analysts are concerned that if interest rates on Italian debt keep rising, the country may no longer be able to afford to borrow on the open markets and instead would have to turn to official lenders like the European Union or the International Monetary Fund. Given Italy's size - its economy is bigger than Russia's or India's - it would certainly test the resources of euro-zone nations and the International Monetary Fund. Such a situation, coupled with the deterioration of the dollar, would most likely result in higher uncertainty among investors and in higher prices across the precious metals sector.

Having said that about the more distant future, we would like to move from Italy to gold and take a look at gold's performance for the upcoming short term. Let's start the technical portion with gold itself (charts courtesy of

We begin with a look at the very long-term chart. If you recall what we wrote on October 21, 2011 (just before the recent rally) in our essay on the bullish outlook for gold titled Why Declines in Gold Do Not Change the Bullish Outlook Right Now:
We are inclined to think that we're relatively close to an upswing in gold. The point here is if a decline is seen before the upswing, it could simply be the formation of a double bottom with the rally yet to come. So a short move down did not invalidate any rally this week since the rally had not yet begun. We have simply seen a rebound after an initial bottom with a second bottom now being formed. As long as the two support levels in the $1,600 range hold, the outlook remains bullish.

Once again, the bullish case appears to be in the cards. From a long-term perspective the recent decline appears quite small. We look at this chart to see if Wednesday's market action is cause for concern.

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