Gold Price Correction Targets And Last Chance For The US Dollar

Anyone that has been around the gold market long enough realizes there is an inverse correlation between the U.S. Dollar and gold prices. Therefore, determining where the dollar is going becomes a fundamental element in forecasting gold prices. The U.S. Dollar is making its last stand before potentially confirming a double top. If this rally fails, prices will start a 6-year bear market. What happens over the next few weeks in the dollar cannot be overstated.

The big picture chart of the US dollar shows an eerily consistent 16-year price cycle, with the last major low arriving in 2008. These cycles are central. Once they top, the dollar will drop steadily for years. This is excellent for gold. A solid close below the 10-quarter moving average in the chart below will confirm the major top in the dollar and that a multi-year bear market has begun.

In the daily chart, I’d like to point out how the dollar needs to hold the recent 91.88 low to prevent the onset of a bear market. A descending wedge pattern has formed with prices recently overshooting the lower boundary. This sometimes occurs during a panic. Prices have reentered the pattern and a breakout above the upper trend line will signal that a significant rally is underway.

Did Gold Finally Top?

The Wednesday ADP Employment numbers were disappointing. There were only 156,000 jobs created versus the expected 194,000. This news event was an outstanding opportunity for the dollar to drop and for gold prices to recapture the $1,300 level. Because gold didn’t react properly to the positive news, one can only assume that the intermediate trend has exhausted and a correction is finally taking place.

After consolidating for 2-months below the March $1,288 high, gold punched through resistance and touched $1,306, but then prices stalled. As a rule, I prefer to see three solid closes above a resistance level ($1,288) to confirm a breakout. Gold failed to do that. Prices are now correcting and should drop back to around the 200-day moving average. Then a new 6-month cycle will begin.

Silver Price Targets

Silver prices were surprisingly strong over the last month, admittedly catching us off guard. Like a child, when silver moves, it favors running over walking. That run exhausted Monday as prices formed an aggressive bearish engulfing pattern near the upper Bollinger Band. Furthermore, prices have closed lower for the fourth consecutive day. This is often seen during a trend change. Correction targets will be the previous consolidation area ranging between $15.20 and $16.00.

An Exhausted HUI

In just over 3-months, the HUI rocketed 130% higher. To call that move explosive is an understatement. Moves like this are dangerous…prices don’t correct sufficiently enough to allow new entries, and anxious investors chase prices ever higher. These often end with an exhaustion gap as the remnant buys at the end out of panicked emotions. It appears one of these gaps emerged last Friday during a blow-off rally, and prices have finally begun an intermediate-term correction. I’m expecting this correction to meet the rising 200-day moving average.

COT Numbers Support A Top

Commercial short positions have built steadily in both gold and silver over the last few months, recently reaching levels not seen in 15-years. This sentiment indicator is not always perfect as a timing tool, but if the professionals have a record number of contracts, it’s best to pay attention.

Conclusion

The intermediate cycles in gold, silver, and miners have finally exhausted. Consequently, prices should drop towards their corresponding targets. What happens from there will determine if precious metals have started a new bull market…and determine if the US dollar has gone into its bear den for a long winter's sleep. Today will see the release of the April nonfarm payroll numbers. How gold reacts after that report will be telling. Please see:  http://www.bls.gov/news.release/pdf/empsit.pdf