Since bottoming out at $682/oz in the autumn of 2008, post the collapse of Lehman Brothers and when financial risk aversion was at its highest on record, the gold price has been tracking upwards, finding clear support from a steeply rising trend line in the past two years.
Progress has also been capped by a rising trend line joining the peaks at $1,032/oz in March 2008, the high at $1,226/oz last December, to form a clearly defined rising wedge pattern (see chart three). Ordinarily this pattern is a bearish formation, but last week the gold price surged through the upper limits of the rising wedge pattern at $1320/oz to hit another all-time high above $1,360/oz. This is a clear indication of the underlying strength of the market and opens up price targets in the region of $1,500/oz and beyond in the coming months.
However, in the short term the dollar index is closing in on a major support level (see chart two) at around 76 which could see a technical bounce, even though I believe it will only be of the dead cat variety. That's important because gold has been tracking up at the same time that the dollar has been weakening so it would be reasonable to expect a short-term pull back in the gold price if the dollar bounces off this support. In this scenario, I would use any pull back into the $1,220 to $1,265/oz range, which would coincide with the rising lower trend line and support from the previous all time high in June, as a buying opportunity.
Alternatively, if the dollar Index fails to hold near term support at 76 then this could lead to a bout of panic selling in the currency markets with traders targeting another 7 per cent fall in the trade weighted index back to the March 2008 low of 70.6. If this were to happen then the gold price, which is acting as a leveraged play on dollar weakness, is likely to surge again without first pulling back to my preferred $1,220 to $1,265/oz entry point. In this scenario, I would buy gold on a clear breach of the critical 76 support level in the dollar index, targeting a price of $1,500/oz by March 2011.
