(OroyFinanzas.com) – Although gold did succeed in pushing a little further ahead to a new high about a week ago, it has essentially remained in a consolidation pattern since the mid-September peak at about $476. This is hardly surprising as it had become substantially overbought short-term. The Commercial short position has continued to increase meanwhile and is now at the highest level for a long time, so it is unlikely that we will see further significant gains while this situation persists. Rather, the consolidation zone is likely to continue for a while yet, with the price fluctuating probably between about $458 and $480. This will allow the overbought condition to further unwind, and it will obviously be positive for gold if the Commercial short position drops back at the same time.

Looking at the 1-year chart we can see recent action in detail. The September breakout was an important technical event, particularly as it occurred at a time of dollar strength, which is reflected in the charts for gold in other currencies, notably the Euro. Due to the fact that gold broke significantly above its earlier peaks there has been a substantial change in psychology, so that the big reaction called for by some writers, on the basis that “it always gives back a large percentage of gains” is considered unlikely to occur. As pointed out in the last update, a 9-month period of consolidation is not normally followed by 2 weeks up and that’s your lot folks. Furthermore, gold’s strong advance in September took it clear above a zone of strong resistance at the top of the 9-month consolidation zone in the $448 – $458 area, and this resistance zone has now become a zone of support that is expected to limit any reactions, so that any retreat by gold into this zone in coming weeks will be regarded as a buying opportunity, particularly if the Commercial’s short interest position drops back at the same time.

As already alluded to, gold’s upside breakout in September was an important technical event. Had it been due simply to dollar weakness, as was so often the case in the past, it would have been nowhere near as significant, but it was not. It happened at a time of dollar strength, and this is clearly demonstrated by the chart for gold in Euros, on which we can see a strong breakout above a multi-year resistance level. It had been remarked upon in the past that once this happened we would be looking at a real international bull market in gold, rather than an uptrend that was simply the inverse of the US dollar’s downtrend. So this breakout was a very positive move by gold with long-term significance.

The 5-year chart provides an overview of the Gold bull market to date. On this chart we can see that having just broken above another resistance level, there should be considerably further to go before the current intermediate uptrend has run its course.

We are now in a situation where gold is digesting its September gains, and with the Commercial’s short positions at a high level, this looks set to continue, possibly for some weeks more, with gold likely to test the support in the $448 – $458 area. However, due to the strength of this support, it is considered to be unlikely that it will drop any lower than this. September’s breakout signalled a new intermediate uptrend that should have substantially further to run, which means that the action since mid-September is short-term consolidation that is allowing the overbought position to unwind, thus creating the potential for renewed advance.

To recap, gold is viewed as a buy on short-term reactions back into the $448 – $458 area, for a continuation of the current intermediate uptrend that is expected to take the price to new highs.

Source: Clive Maund

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