-- Posted Thursday, 27 September 2007 | Digg This Article
Honest Money Gold & Silver Report
Commodities in general and oil and gold specifically have rallied very strongly of late. They are now overextended and appear susceptible to corrective action over at least the short term time frame.
Since July, which is a mere three month time frame, gold has rallied over $100 an ounce or approximately 16.5%. That’s a pretty healthy gain in a short amount of time, which is why the slope of the chart below is as steep as it is.
Notice that the bottom trend line has been broken below. This suggests that a short term correction may be forthcoming. Support based on a standard 50% retracement gives a price level around $700.00
Oil has had an even stronger rally than gold. Since August it has gone from $68.63 to $82.40 for a gain of approximately 20%. Regarding oil there are two external factors that may weigh in on the price structure.
Recently during oil’s rise, WTIC was trading in backwardation, meaning that prices for oil three to four months out in time were trading for $2 dollars less in price. When the price of oil rises and the backwardation narrows as it has, it usually means a correction is coming. Notice the trend line has been broken.
Lastly, Mr. Ahmadinejad, Iran's President, spoke in New York – stating that Iran has no plans for aggressive actions towards any country, including Israel. He added that Iran’s only interest is to maintain a defensive posture, not an offensive one. Regardless if Mr. Ahmadinejad meant what he said – he said it on the world stage for all to hear and will be held accountable accordingly.
I disagree with those who say that gold and oil are about to collapse into bear markets, predicting $40 dollar per barrel oil and $450 gold. Perhaps this may come to pass, but the charts do not say so – regardless if one is making up their own charts and metrics to go with them.
The charts will give ample warning prior to any such event. As a matter of fact they are already giving a warning, but to a much lesser degree than envisioned by those peering into crystal balls. Strong support resides around the $75-$73 area.
Those calling for the collapse of oil and gold seem to have been a bit off on their rise to new highs – both in points and time. A correction is due, it is healthy for bull markets to correct and shake out the weak hands.
All that matters is that higher highs and higher lows are sustained, as that is what makes a bull market rise from the lower left to the upper right of the chart. A correction is most likely; a collapse – most improbable.
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