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Why the Next Move in Gold May Be to the Upside

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A look at gold over the next few months from various perspectives.

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Gold moved sideways for the last six weeks, with each rally and correction sparking either new hopes or new fears about the yellow metal. But focusing on such short-term volatility can rarely bring any good when it comes to long-term investments. That's one of the things that my firm often stresses: One should always analyze the market from different perspectives and keep in mind their order of importance. This week, we will focus on the long term.

Another thing that we have already mentioned is that such universal commodities, which are traded on many exchanges and in many currencies like gold, ought to be assessed taking other currencies into consideration. Hence, to get a clearer picture of the situation in gold -- distilled from the short-term noise, today we will focus mostly on long- and medium-term charts, as well as on the yellow metal priced in currencies other than the US dollar.

To see what awaits the gold price in February 2013, let's turn to this week's technical analysis. We will start with the yellow metal's long-term chart (charts courtesy of http://stockcharts.com.)


Click to enlarge

Little change has been seen in this chart this week, but it is important for a reason that will be touched on when we summarize this essay. The bottom was very likely formed here a few weeks ago when gold prices dipped below the 300-day moving average, which is a very important long-term technical development. Prices now appear to be simply consolidating a bit, which is also in tune with the historical patterns – the rally didn't always start in a volatile way after the final bottom was reached below the 300-day MA – but it happened eventually many times and on each occasion the rally was worth waiting for.

Let us now move on to the yellow metal's medium-term chart. We will use GLD ETF as a proxy.


Click to enlarge

Here, we see that prices moved lower this week but are still above the declining short-term resistance line. While significant volatility has been seen on a short-term basis, the average price has moved very little over the last month and a half.

The situation is very similar to mid-2012, where back and forth price movement was eventually followed by a huge rally. Those whom were not prepared, say last August, would have missed a large part of the upside move.

The price action seen on Thursday was quite similar to January 11, which is when gold corrected after a short-term powerful upswing and managed to move higher before the end of the session. The outlook was bullish then and we think it's bullish right now as well.

The rally will likely really pick up after gold moves above the declining medium-term resistance line (black ellipse on the above chart). However, does the move higher have to happen immediately?
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No positions in stocks mentioned.
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