From gold bear to gold bull?

January 16, 2015 02:44 PM

Bear markets end with extreme bearish sentiment, but positive price action is needed before a trend change can be confirmed. That action can include (among other things) three factors breaking: downtrends, resistance patterns of lower lows and lower highs. There have been positive developments for precious metals beneath the surface, but Thursday’s breakout in gold is more significant. If gold holds this breakout then it will be all but impossible to argue that it remains in a bear market.

Below is a weekly candle chart of gold and silver. Thursday’s Swiss-induced strength helped propel the yellow metal above key resistance at $1,240-$1,250. Over the past four months gold has had every opportunity to sustain prices below $1,200. Within that period gold made four different lows from $1,50 to $1,200. The action of the past two weeks and the break above resistance is a strong signal of an important trend change. Silver breaking its resistance would offer further confirmation of a broad trend change in the sector. 

We’ve written often about gold’s relative strength as well as its importance in signaling a forthcoming trend change. On Thursday, gold closed at a 20-month high in euro and foreign currency terms and is nearing a two-year high against commodities. For months, gold had remained weak against U.S. and global equities. At present, gold is starting to break those downtrends. Below we plot gold against various equity indices (NYSE, Dow Jones World, MS World, S&P 500) in order to visualize this concept.

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