By Bill Downey
The typical gold cycle has a peak price between Mid February/March and a secondary bounce into May/June. In the chart below we can see the long term peaks hitting the top of the upper channel line. (Gold Arrows) The next peak is not due until this mid winter. But we hit the top of the LONG TERM UPPER CHANNEL LINE….a line that has marked the upper boundary of all the gold market peaks during last decade. Did we just get our cycle peak early?

The first scenario is that this pullback we got in December is about to end at or near here at the bottom of the momentum line (see RED arrow right where price is) and another move up into the mid winter timeframe is about to develop. This scenario calls for gold to maintain the same momentum in price escalation as has been the case since September. This scenario calls for another 6-12 weeks of the bull market rise or attempt to rise. The key to a price rise here is whether GLD can hold support of 107 and move higher from here.

The best evidence for a continued correction after a short term bounce is the volume spikes at the bottom of the chart (See Red Arrows). Let’s look at each volume spike on the chart and see what conditions prevailed afterward. First and most important is the fact that each and every red arrowed volume spike had one thing in common. It led to PRICE REACHING THE LOWER LONG TERM CHANNEL LINE. Will this current volume spike (the Yellow one) lead to the same thing? Should we not expect that the most likely thing for price to do now would be to pull back to the bottom of the channel line as it has done so over the past four years? The answer according to the chart is only if we fail at the momentum channel and move below the lows of December. Then the prospects for a move lower would become the odds favorite.

Another observation is that every gold peak correction has at least declined to the blue and red moving averages over the past 4 years. In fact we do not see any pullbacks that did not come down to the moving averages.

One of the other considerations is the length and pattern of each important correction on the chart. Corrections over the past year corrections have comprised of a 5-8 week decline, a bounce and then another leg down. Many analysts have pointed this out over the past few days.

What should we watch for?

On a short term basis for gold price to hold here and climb higher inside that small momentum channel that price has been in since September. If it can do that the potential to extend this current rally into winter will still be in play and will be the favored scenario. The potential to fail to make a new high during that rally and a subsequent drop below the channel line is a possibility.

Any failure of that momentum line and break of last week’s low would most likely result in a move lower towards the blue and red moving averages and the area where the lower channel line meets with the small down trend line drawn off of the previous highs from 2008. (see chart above) That would be an ideal place to scale in some positions.

Another factor is the US dollar and its seasonal price tendency over the last 6 years.

What is bullish about the US Dollar?

Last year, the dollar proved to be the safe haven during the debt crisis. While it could be gold this time, we need to see that action before saying so. For now, any debt crisis situation could cause a temporary move to the US Dollar.

The other important factor is the US Dollar carry trade. This is where investors borrow dollars and put the money into other currencies paying a higher interest rate. The money can also be used as a speculation into any other financial instrument.

In past years, the YEN provided the cheap currency from which to borrow and speculate from. The super low rates in the US Dollar are comparable to the YEN rates. Interestingly, the yen is sitting at the UPPER end of its value range while the US Dollar is at its lower end. Whether traders view this as bullish (weaker US Dollar than YEN suggests dollar remains weak) or bearish (expecting YEN to pullback and dollar to rally) will go a long way in determining which currency is favored for the carry trade. In December the cost of the US Dollar (as reported by the Aden Sisters) fell below the yen rate cost for the first time in 16 years.

In summary if gold can maintain its price in the upper momentum channel the rally should continue into mid winter. Mid winter is usually the time that gold peaks and pulls back into spring. From that perspective the rally is probably in its latter stages but one more leg up before a spring correction has merit based on the past. The easy money has probably been made for gold and the next six months will be a lot trickier from here. Regardless of when the winter rally peaks this year, the highs of January, February and March are usually not that far apart in price. The potential to churn in a range of 1100-1200 is likely during this month.

In the longer term, until things change, gold is in an uptrend. Should we break below the momentum channel and below the lows of 105; the potential for a pullback into the main channel will be in play. Any pullback to the lower end of the main channel this year should be considered a buy opportunity.

The potential of a credit contraction and another collapse cannot be excluded. Should the deflationists be correct and a major setback takes place sometime in 2010, we would view it as a buy opportunity. Just be aware that the feds and the government will do everything in their power to avoid such a risk.

The data coming in still suggests that the gold shorts are in trouble, and that physical gold delivery is a problem as rumors continue to swell that deliveries are negotiated in cash. One of the rule changes at the COMEX supports that assumption.

The problem is that too many mainstream participants are arriving to a market that is only the size of a Wal-Mart or Microsoft. A panic move into gold will be unstoppable.

This is not the first time that the end of the world has been proclaimed either and that is a great argument. However, all things being equal, all the paper money divided by all the gold still shows a value of about $3000 dollars. History does show that major inflection points do occur. The greatest threat is the credit deleverage factor.

While no one knows the future for sure the chart at the top of this update has two main channels……….a small momentum channel that has been in effect since September and a larger main channel. BUYING at the bottom of each channel line looks to be the way to follow the trend.

The only thing that has had ANY EFFECT on gold over the last 8 years was the credit crisis of 2008. Should we get another crisis this year and gold is pulled lower, we think it would be a great opportunity to back the truck up and buy.

At some point in time this year, price will touch the 200 day moving average. Buys near that area should also be a good play.

As long as gold is in the momentum channel expect higher prices. A close below the lows of December could suggest a move to the lower end of the main channel.

If everything plays out like it usually does, gold has one more run this winter, will correct price into the spring or summer and do it all again in the autumn.

Courtesy: www.goldtrends.net

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