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Dark Clouds for Gold Seem to Have Dispersed

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The situation in gold remains very bullish for both the short term and long term based on this week's charts.

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According to a Bloomberg survey at a precious metals conference this week, gold is poised for a 21% gain in 2012, extending its bull market to 12 consecutive years. Bullion may rise to $1,897 an ounce in New York by December 31, from $1,566.80 at the end of 2011.

They have plenty of reasons for optimism, despite the recent drops in price. Demand for gold has strengthened as Europe seeks to contain its debt crisis, and China has displayed a growing appetite for gold. Governments have kept interest rates at all-time lows to shore up growth. Central banks have been net buyers for three straight years, the longest stretch since 1973, according to World Gold Council data.

They are not the only ones optimistic about gold. The specter of inflation is making some turn to the yellow metal.

"By the time inflation becomes evident," says Paul Johnson of the $14 billion Paulson & Co. hedge funds, "gold will probably have moved, which implies that now is the time to build a position."

And just recently the Islamic Republic News Agency reported that Iran would begin accepting payments from its trading partners in gold. This move further reinforces the universal currency and store of value aspects of the metal. Iran already allows its trade partners to pay in their native currencies. It has also accepted payment in the form of goods from both India and China. It will now take payment in gold. The fundamental situation is clearly bullish for the yellow metal.

Let's turn to the technical portion with analysis of the gold-to-bond ratio. We will start with the long-term chart (charts courtesy of http://stockcharts.com.)



A look at the gold-to-bond ratio provides us with the proper long-term perspective in viewing gold's decline last week. Analysis of this chart suggests that the bullish trend definitely remains in place, as no breakdown has been seen below the long-term support line.



In the long-term chart for gold, we see that the important support level mentioned in my article on the possible rally in gold (see Final Bottom or Not, the Situation for Gold Remains Bullish) has been reached. Quoting from the abovementioned article:

Last week saw several important developments as gold's price decline approached the 50-week moving average while the RSI level remained slightly above the 50 level. This is a bit ambiguous with respect to what likely seemed to be needed for the final bottom to form.

Over the past few days, gold's price moved slightly below the 50-week moving average and afterward moved back above this level. In addition, the RSI moved below 50.

These two signs defined the bottom seen in early 2007, and it appears that the current bottom is already in at this time. Also, the possible correction appears to have happened already.



Taking a look at the chart from 2006-07, we see that the major bottom seen early in 2007 saw gold bottom halfway between the 50% and 61.8% Fibonacci retracement levels. Huge volume levels also accompanied this local bottom. Furthermore, gold's stock prices visibly declined at the same time and the RSI level moved close to but did not reach 30. Now let's take a look at where we are today.



We now turn to the current short-term SPDR Gold Shares ETF (GLD) chart. Gold's price has declined past the 50% Fibonacci retracement level but is still above the 61.8% level. In fact, last Wednesday, gold's closing price was between the two, and the bottom formed on significant volume. Also, the RSI level declined close to 30 and then moved back up. The situation is nearly identical to early 2007.

In my opinion, the striking similarities make my analysis this week quite reliable. Many factors are very much in tune, and it is likely that this pattern will hold for the next couple of months. Keep in mind that it may take a week or so for the rally to really get under way.

Some might say that the bearish head-and-shoulders pattern is visible to some extent, but a closer look reveals that this is not really the case. The shoulders are not really symmetrical. In early 2007, the pattern was even more visible, and the target level based upon it was lower than the actual bottom that was formed. With the pattern less visible this time, and so many other factors aligned perfectly, it is likely that the bullish implications here will prevail.



In this week's chart of gold from a non-USD perspective, we have a confirmation of the bullish outlook we have seen in the previous charts. Another move to the downside target area, which was reached last week, has been seen, and it's likely that a double bottom will form and the ratio will then move higher. The breakout above the declining resistance line (based on 2011 tops) has been well verified, and it seems that now is the time for the rally to begin.

Summing up, the situation in gold remains very bullish for both the short term and long term based on this week's charts.

Thank you for reading. Have a great and profitable week!

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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