-Dugald Malcolm

Montreal, Canada

It has been a while since I have had an opportunity to give an update on the status of gold. In December of last year I had mentioned that gold was taking a breather from a four week rally that had brought its price from under $1,042 an ounce to over $1,226 an ounce, an almost 18% gain. There were rumblings from critics at the time, saying that gold was way too overbought and that it might very well be in a bubble that was about to burst. There forecast proved to be overly pessimistic.

The price movement of gold did indeed pullback from those high levels. From late November to the beginning of February, the price of gold gave back almost all of its gain made in the aforementioned four week rally. On February 5th gold put in and intra-day low of $1,044.80, but managed recoup its losses and then some to end the day at $1,065.60. In so doing, it managed to successfully retest the lows made prior to the four week rally as well as forming a bullish hammer on the daily candlestick charts.

While sometimes frustrating for investors, price corrections can a play healthy part in a bull market. Pulling back 10% or more to test trend lines, moving averages or previous levels of support and, thereafter, resuming previous price directions adds validity and strength to the overall upward trend. It is something we have not seen in the major markets indices since the March 2009 lows. Although there have been price pullbacks, none of the them have resulted in a fully fledged price correction.

Gold, on the other hand, has given us a price correction and has subsequently gone on to form a triangular consolidation pattern. Investors took particular interest in this consolidation pattern, which had been in place since late last year. Since around the same time, the US dollar has shown considerable strength. Since the price of gold tends to move in the opposite direction of that of the dollar, some feared a breakdown of the consolidation pattern was imminent.

In the beginning of April, however, in the face of a stronger US dollar, the price of gold managed to break out of the triangular consolidation pattern and has been on a tear ever since. What's more, is that it does not look like it will be stopping its advance anytime soon, with the MACD showing continuing strength and the ADX line poised to cross the 20 line to confirm a rising trend is in play. Also of note is what appears to the break above a neckline of a Head-and-Shoulder Bottom Formation. The break out will be confirmed with a close above $1,174.

The next hurdle for gold after that will come at the $1,226 level, its previous high made in December. Let's see if gold can manage to maintain its new found spring shine.