History is a worthwhile subject to study when it comes to commodity prices, if the study is undertaken with the relative relationships understood. For instance, there are those worried that the gold rally is running out of gas. At first glance it would appear that a ceiling is in place in the form of the 27-year high. In January of 1980, gold reached the then astronomical level of $873. When looking at it from an inflation adjusted angle that $873 would translate to $2,135.68 today!
Ceiling? What ceiling? In this light gold looks a bit shinier and as gold historically rallies at year-end, this December is primed to perpetuate that. “Seasonal rally,” shows how gold has peaked in December the last three years. A seasonal chart would also show this tendency over many years. Gold has already reached a 27-year high after an increase of 29% this year and the two main external factors driving the market, high oil prices and the crashing dollar, are in place to drive gold even higher. Gold reached the highs last time only after the price of crude oil doubled that year.
Interpretations of the weekly stochastic would indicate a market that is so overbought a correction is imminent. Do not get fooled as the stochastics are actually embedded, which is bullish. A look at the chart shows a strong bull market in gold from the middle of 2005 through the first quarter of 2006 despite the stochastics showing that gold may be overbought.
Almost every technical indicator is indicating an up trend and over bought market. Open interest is up and volume is up, supporting a continuation of the trend. Trying to pick a top in the gold market could be an act of futility.
J.B. Siewers III is a registered futures broker and independent trader who has spent 20 years in the futures industry, the first 13 of which were spent on the CBOT floor. Reach him at: firstname.lastname@example.org.