After years of languishing under $400 per ounce, gold made an impressive run in the second half of 2004 taking out the $400 mark and not looking back. Gold, basis the February 2006 contract, spent a good portion of 2005 consolidating in the $425 to $460 trading range.
In mid September gold broke out and now has established a new trading range in the $460 to $480 range. A point worth noting is that it has done much of this work without the help of the U.S. dollar. Gold generally has an inverse relationship with the dollar, as it is a dollar denominated asset. The dollar and gold have been riding higher on the perception of inflation. As the Fed has raised interest rates and crude has rallied, the greenback and the shiny mineral have been able to sustain their move higher in tandem.
Currently gold is in the process of testing the lower end of its current trading range as crude oil has pulled back to retest the $58 to $60 per bbl. trading boundary. Although gold has pulled back $20 from its highs, the uptrend is still intact. There are layers of support about every $5.00 down to $440. A close under $440 signals a quick trip down to $420 and a close under that would trigger a washout to the all important $400.
Conversely, if gold can eke out a close above the yearly high of $486, it could be a very rapid move up to the $500 level. A close above $500 signals rallies up to the $525 mark. Though support at $469, which is the 10-day moving average, was recently taken out, there is still strong support at $455, the 20-week moving average.
Recent weakness has not breached the long term bullish outlook. Although the daily charts look a little precarious after the recent break, the weekly and monthly charts still look constructive.
Charles Nedoss is a metals analyst with Chicago-based Peak Trading Group. E-mail: firstname.lastname@example.org.