Although a number of pundits have recently urged investors to sell into the recent strength exhibited in the precious metals market, the weekly chart of the Philadelphia Gold and Silver Index (XAU) suggests something very different. With oversold conditions present and with a well-defined basing pattern continuing to unfold, the XAU appears to be in position to move higher, if not sharply higher.
By itself, the current basing action seen in the XAU would be an enticement to technical analysts and to traders who follow price patterns to buy the gold miners at current levels. A break above key downtrend resistance at the 103.40 level, however, could trigger a new round of buying activity by precious metals bulls and could also force hedgers as well as bullion bears to cover their short positions.
Names like Barrick Gold Corp. (ABX), Eldorado Gold Corp. (EGO), Randgold Resources Ltd. (GOLD) and Newmont Mining Corp (NEM) all appear to be forming bullish reverse Head & Shoulders patterns or variations thereof. Others like Agnico Eagle Mines Ltd. have recently broken above key downtrend resistance barriers or are about to do so as in the case of Freeport-McMoRan Copper & Gold Inc. (FCX).
Clearly, comments by Fed Chair Janet Yellen in the Q&A session following the latest Fed policy update last week, combined with the negative interest rate scheme on bank reserves by ECB president Mario Draghi, and the push to trigger inflationary conditions by the Bank of Japan have played a role in the precious metals jump last week. Doubters nevertheless believe that wage inflation (which represents 65% of real inflation in the U.S.) is not about to occur. Although in the end they may be right, a number of states are initiating minimum wage hikes. That, along with a spike in food and fuel costs and a sticky situation in Iraq might be why the current chart of the XAU suggests that higher gold prices are likely unfold over the short-to-intermediate term.
Jim Donnelly, Olson Global Markets