If you have been an investor in gold related stocks over the past 6 years you will know what a depressing time it has been. All of the fundamentals suggest that gold should be a lot higher and yet down it continues to go while the general markets, house prices and bonds hit all time highs. The important point here is that fundamentals don't always equal price. Technical analysis has it's faults but it can provide a bigger picture to what is going on in the market. The theory behind technical analysis (looking at the charts) is that it contains all of the fundamental information from all of the markets. The fundamental information is contained within the chart. Certain patterns therefore begin to emerge which can, with some degree of reliability, predict future prices. Those patterns are really a reflection of human behaviour rather than just price information. This is why charts often behave in relation to Fibonacci ratio's, because life itself often corresponds with Fibonacci ratios.
OK, so with that out of the way I'd like to show you that we are at an important technical level with gold in dollar terms. As of today the gold chart might be predicting the end of the dollar. A big statement to make? Yes. But if you consider that gold has broken out of a 6 year down trend in every other currency you might think again. The price of gold is the canary in the coal mine for the dollar. Let's take a look at the chart and you will see what I mean.
This week we had a major breakout in the gold dollar chart. It broke through the 6 year down trend. It then took some entity $4 billion dollars worth of gold sales to push the price down below the break out level resulting in a failed break out. Regardless of what you believe about precious metal manipulation, $4 billion dollars is a desperate amount of money to move the gold price just $30 or so. Why would someone gamble such a huge amount of money at such a pivotal breakout in the gold price? Because it's all about the dollar.
With gold free to run in every other currency, but dollars, all it takes is a solid breakout in the dollar price and we will see a huge run up in the dollar based gold price and thus in every other currency. The problem is that this is has more to do with dollar fundamentals than it does gold, gold is merely the flip side of the same coin.
As of right now we are witnessing a failed breakout. The price of gold has fallen back below the 6 year trend line. However, look again at the chart. We also have an 18 month up trend which also has not been broken. At some point in the next 6-12 months the two trends will intersect and gold has a decision to make. Up massively, or down massively. Here is the problem with the down scenario. The US and Chinese economies are getting weaker and a great many other fundamental factors are converging that are dollar negative. To attempt to strengthen the dollar in a weakening economy would be suicide for the US economy. Maybe we will see a June rate increase and further consolidation in the gold price, but the clock is ticking. A failed break out this week will only result in another retest in the future. At some point gold will break out, and it's looking like it will be soon (in the next 12 months).
I conclude that the break out in gold will predict the end of the dollar as a reserve currency. It won't happen overnight but what we will see is a quickening of the dollar demise, as gold asserts itself as the asset of choice during difficult times.
A few will profit from a rise in gold, but many will lose terribly. We do indeed live in interesting times. Let us pray that the inevitable rebalance will be a rebirth of something greater. I live in optimism.
Good luck and god speed!
(chart courtesy of livecharts.co.uk)