The market is alive with chatter about the weakness of the U.S. dollar, the growing demand to settle trade contracts in yuan and fears of developing U.S. inflation. Is this the time to switch from equity investments into gold?
Let's see whether we're ready for that golden handshake.
The weekly gold chart has two important features. The first is the series of support and resistance levels. The lowest of these is at $700 and was tested several times in September 2008. The highest of these is at the psychologically important level of $1,000. It was briefly broken in March 2008 and again in January 2009.
Rallies have moved towards this level on several occasions, but none have been strong enough to seriously break above $1,000. It remains an apparently elusive target. However, once this type of level is breached, it can lead to a very fast rally.
The second feature is the long-term trend line starting in mid-2005. The placement of this trend line presents a problem. The trend line shown on the chart uses the majority of touch points that developed in 2005, 2006 and 2007. It excludes the cluster of price dips below the line in 2008. These dips do not invalidate the trend line, but they do confirm we need to use the line with caution.
If the position of the trend line was lowered so the September 2008 dips were included, then too much of the previous trending price activity would be excluded. This would make the trend line even less useful as a method of trend analysis.
With this caveat in mind we can look for support in the $880 level. Temporary support has developed near $920, but this is a co-incidental clustering of prices near this level. This level has provided a mild degree of support or resistance in the past so its not particularly significant as a chart feature.
The key development is the ability of price to remain above the trend line as it develops increasing pressure to push above the $1,000 resistance level. There are no valid chart pattern projection methods which can be applied to set an upside price target. However the current compression levels suggest an initial breakout target near $1,120 to $1,200.
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These are conservative breakout targets. Round number psychological resistance levels are important. Once broken, as with $100 oil, they often lead to a very rapid momentum rise. Aggressive traders take an early position in anticipation of a break past $1,000. Cautious traders will join the breakout as it develops. The hopeful will wait for pullback after the breakout.
The series of failed attempts to convincingly break above $1,000 suggests this target also remains elusive in the immediate short term. A sustained breakout move above $1,000 and a retest of this as a support level, sets a longer term upside momentum target near $1,300 to $1,400. The long term support trend line points the way to these elusive targets.
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