Wednesday, October 1, 2008

gold: the pros and cons

Today I'm going to reprint part of last nights update.

The question is whether gold's recent explosive move was the start of another leg up in an ongoing secular bull market or a counter trend rally in a cyclical bear market.

Here are the Positives:

Gold has rallied strongly back above the 75 week moving average.
The COT recently gave us an extreme bullish reading.
Physical gold and silver are in short supply.
The Gold:XAU ratio is at levels that have signalled good buying points for miners in the past.

Now the negatives:
Gold is still clearly making lower lows and lower highs.
The 50 DMA has plunged below the 200 DMA unlike any other time during the secular bull market.
The dollar rallied strongly yesterday possibly changing the 19 week cycle low to come in at a much higher level than I previously thought. I also thought the dollar would test the 200 DMA before moving higher. Now it looks like it wants to break out to new highs.
Gold tested and was rejected by the 62% retracement level.
The current trading cycle is only 13 days old. Most trading cycles last 18 to 28 days. With yesterdays decline gold is already close to testing the major support level of $850. If this level fails there will probably be heavy liquidation in the gold market. Gold needs to hold above this level and it needs to do it for the next 5 to 15 days.
The XAU rallied 36% from bottom to top, so the gold:XAU signal could already be considered to have worked, so to speak. Now the XAU and HUI are both trading back below the 200 week moving average.
Gold and the XAU have both broken back below the 10 day moving average. The miners are threatening to break below the 20 DMA.
Most of the gold stocks fit all the requirements for selling short according to William O'Neil .
Finally Platinum which has led the precious metal bull both up and down broke through the 06 lows yesterday.

There you have it. The pros and cons for precious metals. Everyone can make their own decision as to how they think this will play out.