By Jim Donnelly, Olson Global Markets
As politicians in Washington D.C. dig in their heels in one of the most partisan showdowns in recent memory, the prolonged battle over a continuing resolution on the budget, Obama-care (and later on the debt ceiling) raises the likelihood that the Fed will stay with their monthly $85 billion security purchasing program for a longer period of time than had been expected.
Moreover, the absence of any near-term agreement in Washington could increasingly become a drag on the economy as already evidenced by a partial government shutdown. This, in turn, could send both the Dollar Index (DXY) and 10-year U.S. Treasury note yields lower. On the other side of the ledger, such a set-up could induce investors to move back into the precious metals market and into the gold and silver in particular.
Long-term monthly charts show that the Philadelphia Gold & Silver Index (XAU) is again approaching a test of long-term trend line support currently at the 84 level with oversold conditions present. This is a technical set-up that generally favors a buy-on-weakness strategy over the near-to-intermediate term.
And while seasonal purchases of gold in India (the largest purchaser of gold in the world) has been muted since June due to a sharp setback in the Indian economy and stock market, the suggestion of a decline in U.S. interest rates could help to buoy emerging market economies (including India) as sovereign credit spreads and their trade deficits begin to narrow.
When looking at the charts of gold miners, a number of basing patterns also appear to be developing. For example, a bullish reverse Head & Shoulders pattern seems to be developing on Barrick Gold Corporation (ABX). That pattern targets a move up to the $29 area from $18 currently. In addition, the charts of both Gold Corp (GG) and Newmont Mining (NEM) show that their respective prices are now approaching long-term trend line supports on each.
As a result, a buying opportunity on the XAU appears to be unfolding which should prove to be a rewarding experience over the not-to-distant future.