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Technical Signs Point to Higher Prices for Gold and Oil

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Charts and analysis show a bullish outlook for these two commodities.

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The Reserve Bank of India on Tuesday surprised investors with a bigger-than-expected half-percentage-point cut to its key lending rate, sending it to 8%, saying the state of India's economy is "a matter of growing concern." Assuming a normal monsoon season and continuing improvement in industrial production and in the global outlook, the RBI said it expects growth for the current year at 7.3%. Inflation in India slowed less than expected in March. Meanwhile, the Indian post office system is offering a 6% rebate on gold coins of various denominations for the forthcoming Akshaya Tritiya festival, which is one of the biggest gold-buying festivals in the country. At present, gold coins are available at more than 800 post offices across India. For small investors the post office is an attractive option since they can buy gold coins in low-end denominations like 0.5 gram, 1 gram, 5 gram and 8 gram. Traders say high sales are a sign that the yellow metal is gaining acceptance as an ideal investment in the world's biggest gold-consuming nation.

There are some places in the world that don't seem to feel the pinch. A 24K gold-plated Apple (AAPL) iPad 3 will be unveiled at Damas Jewellery in Dubai Mall next week before being auctioned off for charity. If you're considering buying one of these gold iPad 3s, keep in mind that it can handle overheating issues and it is corrosion-free. Gold is one of the most non-reactive precious metals on Earth. The gold-plated iPad 3 costs more than $5,499.

And the best part is, just think how good gold charts will look on that gold-plated iPad. Speaking of charts, before turning to the technical analysis of gold, I would like to provide you with my firm's comments on the general stock market (charts courtesy of http://stockcharts.com).



On the above, long-term chart we see that the RSI level is no longer close to 70, and thus the situation is even more similar to late-2010 than it was weeks ago. Last week we wrote the following in Investing Insights for Silver and Gold Using Inter-Market Correlations:

(...) we can see a similarity between the trading patterns of mid-2010 and now. Back then, stocks reached a bottom in a similar way and then showed a sustained rally, had a small consolidation around the level of previous highs, and then continued their rally.

Consolidation around previous tops is something that we saw back then and what we have right now. A substantial rally followed back then, so this is a likely outcome this time as well. The long-term picture is clearly bullish.



In the short-term S&P 500 chart, we have a bearish picture. Prices have slipped below the short-term resistance line and consolidated close to the 50-day moving average. Consequently, the breakdown has been confirmed with three consecutive closes below the line.

As a result, the outlook for stocks appears to be slightly more bullish than not. When long- and short-term pictures are in conflict, the long-term implications usually prevail. Therefore, the overall situation in stocks is rather bullish in our view.

Let us now take a look at the most popular commodity – oil.



In the crude oil prices chart, we see that some consolidation took place after prices reached a resistance line earlier this year. The suggestion here is that once the consolidation is complete, prices will rally once again. The correlation with precious metals on a medium-term basis has not been very meaningful. Prices have been below their 2008 highs while, at the same time, gold prices have been above theirs.

Short-term moves often align, however, and it now seems that once oil prices begin to rise, gold prices will do so as well. They have pretty much moved in tandem since the beginning of the year, and the situation, therefore, looks quite favorable for gold based on the signals seen in this chart. The price of crude oil has already consolidated and appears ready to move higher. If it manages to move above the declining resistance line, a significant rally is likely to emerge – also in gold.

Now, let's have a look at gold – this week we will feature it from the non-USD perspective.



The chart shows us signals which are quite bullish. There was no breakdown below the declining support line, and the move below the rising support line is now being invalidated. The latter is based on intra-day lows.

The recent price action is similar to what was seen in mid-2009 and late-2011 when prices approached but did not break below this rising support line. Based on these prior, similar patterns, the outlook now is bullish as no lower prices were ever seen in either of these previous cases.

Summing up: The long-term outlook in the general stock market remains bullish as does the situation in gold.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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