In my previous post on June 4 2012, I have given a heads up to my readers on Gold. The minor trend on gold was broken and the target for gold seemed to be 1700 USD. Gold is already trading near that level and now it had also broken above its primary trend line.
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| Gold Weekly Chart |
Gold was consolidating since last one year, and the have given a breakout from the pattern. Since the consolidation has lasted for fairly long period of one year the implication for this breakout would be very bullish. If gold sustains above the trend line for one more week the target for gold would be about 2000 to 2100 USD. Traders can go long on gold with a stop of 1590 and Investors can go long on gold with a stop of 1500 USD.
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| Gold Monthly chart |
Before we
delve into long term prospect of gold let us look into structure of gold and
how the prices have moved since gold was de-pegged to USD. From 1971
to 1979 Gold prices saw prolific run from 35 USD to 700 USD in a period of 10
years. This move unfolded in three waves
as we can see in the chart.
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| Gold Monthly chart |
Wave 1 for gold took the prices from low of
35 USD to a high of 200 USD. During Wave 2 price corrected from high of 200 to
100 USD which was 50% correction. In wave 3 gold prices went up from 100 USD to
700 USD. After that gold consolidate at these levels for 20 years and prices
came down to 200 -250 USD an ounce.
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| Gold Monthly chart |
The current upmove in gold started in 2001 where gold moved up from low of 250 USD to high of 1921 USD.
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| Gold Monthly chart |
Although
gold had broken out from 1 year long triangle pattern as shown in the first
chart, if it fails to sustain above 1700 or go above 1900 USD than it will continue
to move sideways. In that case gold will reach the lower end of channel by
April 2013 and a new bull run should start by then.
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| Gold Monthly chart |
In the
given chart we can see the retracement levels for gold. Gold prices took
support at around 1520 levels which was 23.6% retracement. Gold had not
fallen below 23.6% retracement, which implies that the underling trend in gold is very strong. It also indicates that the next upmove in gold will be
very dynamic and violent.
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| Gold Monthly chart |
If we
assume that the current upmove in gold is going to be of same intensity of that
in 1970 -1980 and we extrapolate that move on current cycle, we can see that gold
had only done 38.2% of that move. The target for 38.2% was at 1984 USD and gold
made a high of 1921 USD. Ultimately I think this uptrend in gold will take this
metal to atleast 50% level where by the prices would reach 2517 USD or higher.
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| Gold Monthly chart |
If we adjust gold prices for US Consumer price
inflation we can see that gold made a high of 3.2X consumer basket in 1980. Today
gold is trading at around 2.6X consumer basket. We all know that government
data is manipulated and the method of calculating CPI have changed considerably in last 15 years. I believe that US CPI is under represented by a full 200
BPS. Even If gold peaks at previous levels than the target for gold should be
2100 USD considering US CPI has not been under reported.
If we value
gold aggressively and believe that US CPI has been under stated by atleast 200
bps we can assume that gold is still trading at 2X consumer basket, then price
target for gold should be around 2700 USD.
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| Gold Adjusted for US CPI |
Silver has
also broken above the consolidation pattern. Readers must remember that I was
bearish on both commodity given that Gold goes below 1520 levels and Silver
goes below 26 USD level. Both commodity had held above that level. Now we have
got an upward breakout in both commodities. Which indicates that both metals
are should move higher in coming period.
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| Silver Weekly chart |
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