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Update: Gold


About a month ago, I posted on the blog that we were taking some profits in Gold as it had gotten ahead of itself and we anticipated that we’d see a pullback in price. The graph above was presented in that post with some annotations to help you see what I saw. I noted that the blue arrow in the RSI top grid showed an overbought condition that generally precedes a drop in price. I also showed you a green circled area in the Full Stockastics indicator that confirmed the RSI indicator (it was an orange circle in the original posting).

As you can see, the indicators worked as they should and the price of gold has fallen. It has not yet reached the original target we set (honestly, the price kept going up longer than I thought it might), so we are re-evaluating that target level. However, what is really interesting is the area of the graph I have indicated with the pink arrow pointing to the right. You can clearly see that the price is consolidating between the two moving average lines – and those lines are converging upon each other.

This convergence is called a volatility squeeze, and you will likely see a short-term big move one direction or the other. Which way? If the RSI was showing an oversold reading (a large area of the graph below the bottom line of the top grid that would look like the mirror image of the area indicated by the blue arrow) I’d tell you now was the time to be a buyer as the most likely direction of the move would be up. Unfortunately, we do not have that – which is confirmed by a low but not oversold reading in the Full Stochastics.

So, I’m going to go with my gut feeling of the sentiment I can see in the graph and say that the most likely move will be down to our original target – which happens to now coincide with the 89-day moving average line and the two June price highs. That should be a good low risk buying opportunity since the intermediate term indicators that I’ve annotated with diagonal blue lines show that their trend is still up. The only conflicting intermediate term indicator that is showing a conflicting reading is the MACD which is pointing to an intermediate term pullback. So, as always, we will evaluate the situation before we buy to make sure we are not blinded by our desire to move cash off the sidelines in an effort to increase our gold allocation in client accounts.

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