All of a sudden, Gold is in the high $US 550s again thanks to a $US 10.30 surge on February 24. Last week, the correction found a floor when the spot future price closed just below the $US 540 level twice, on February 13 and again on February 15. Now, with Gold back above $US 555, our strategic $US 5 x 3 point and figure chart has turned up again.
As we have been pointing out on our Gold bull market page, it took Gold the first nine months of 2005 to exceed the high ($US 456) it had set in December 2004. Since it DID exceed that high back in September 2005, the corrections have been short. The current one is the third since November 2005.
There have been three downturns on the $US 5 x 3 point and figure chart since Gold exceeded its 2004 high back in September 2005.
The "IF" above is a very big one. It is true that the previous two uplegs on Gold were remarkably similar in both magnitude and duration. On strategic point and figure charts, such things often happen. They happen most often in the lead up to a REALLY big move in the same direction. And, of course, in this case the direction is up. Please take another look at the $US 5 x 3 point and figure chart (link above). You can see that the last two downturns and subsequent upturns have taken place well ABOVE the trendline (the dotted red line) which marks the TOP of Gold's 1981 - 2005 trading range.
We have a nickname for such events. We call them "trader waves". When any market breaks through a VERY significant resistance level, it tends to accelerate upwards. One example of this is what happened when the Dow finally decisively broke through 1000 resistance in the early 1980s after failing at that level repeatedly ever since the mid 1960s. Another has been the acceleration of Gold since it broke decisively above the $US 510 level at the end of last year after failing at that level repeatedly since 1981.
"Trader waves" are short sharp downturns in an accelerating market as those who are in the market to make a "quick buck" see the market rise faster than they anticipated. These traders decide to take the "windfall profits" they have made very quickly and sell. The selling brings about the downturn. We have seen this happen repeatedly in markets of all kinds, and it always seems to happen twice - hence the plural - trader waves.
Gold broke above the TOP of its 1981 - 2005 trading range last December. Since then, we have seen one trader wave in December 2005. We have now seen another sharp downturn in mid February which has now been turned around on the chart. This has the makings of the second trader wave, but it is not yet proven. It will not be proven unless and until the price rises to a point three clear "Xs" above the previous high. Since the previous high on the $US 5 x 3 chart is $US 570 (the $US 572.50 close of February 2, we are now looking for a spot future close of $US 585 or higher to confirm the SECOND trader wave.
Please note carefully that if we get another downturn on the $US 5 x 3 point and figure chart BEFORE Gold reaches that $US 585 figure, then the second trader wave is NOT confirmed.
If a second trader wave IS confirmed, then the current Gold upmove, which has now turned the $US 5 x 3 chart up again, is likely to go MUCH further than did the previous two before another resistance point is reached.
Why is this so? It is so for a number of reasons. Each time the "traders" sell out, the Gold passes from "weaker hands" to "stronger hands". By "stronger hands" we mean into the hands of individuals who are much more likely to hang onto their Gold than those who sold it to them. Second, everyone with an interest in the Gold markets (and there are more of them every day) knows that the trend is up. They also know that the trend has been accelerating lately. Each correction shakes out some holders and frightens the others to some degreee. But lately, the corrections have been short-lived and the subsequent upmoves very lucrative indeed.
There comes a point in any bull market when corrections simply don't have a chance to gather momentum because there are so many people waiting to buy on any sign of "weakness". There comes a point when the people who are in the market decide that it is going higher and the people who are waiting to get in decide that is going higher too. At that point, selling pressure diminishes and buying pressure increases dramatically. We have noticed that historically, it has usually taken two short sharp corrections to bring this state of affairs about. That is precisely the situation that Gold is in now.
Making this prospect even more likely is the fact that we are almost into March. March is the month when the US M-3 will no longer be compiled. It is also the month when the Iran oil bourse (selling oil for Euros instead of US Dollars) is scheduled to begin. It is the month when an all out Civil War may erupt in Iraq and the Bush Administration might be crazy enough to attack Iran. And last but far from least, the US Treasury has (as of February 16) hit its debt limit. Throughout March, the pressure will be mounting for the Congress to lift the limit - or to abolish it. If they lift the limit, it will be the fourth time in the past five years that they have done so.
There is, of course, the caveat that the global financial powers that be have all their eggs in the fiat money basket and will go to any lengths to keep it intact. They have only one problem. It is impossible to keep a financial system based entirely on paper debt intact, and it has never been done in history. This is history's first experiment with a GLOBAL system based on paper debt. It will, inevitably and inexorably, come to a bad end.
As long as the spot future closing price of Gold stays below $US 585, the situation is "under control". But if the present upmove on the $US 5 x 3 chart pushes the price above $US 585, the likelihood of a BIG upside acceleration increases dramatically. It will be interesting to see what happens.