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Home | Christopher Wallace | Gold Nearing Top of Channel

Gold Nearing Top of Channel

Christopher Wallace - August 30, 2013

Gold has had a great run off the July bottom; the gold ETF GLD has now rallied just about 20%.

While I strongly doubt this is the end of the gold rally, I think that some consolidation of the recent price gains could occur in the short term. A trend line formed connecting the bottoms at the end of June and early August. Drawing a line from the first interim top occurring in mid-July parallel to the lower trend line creates the potential channel for GLD to travel within. It is nearing the top of that channel.

Further, RSI has moved into over-bought territory. Since rallying off of the lower trend line, 11 of the last 14 trading days have been up days. Traders may want to defer purchases and wait for some consolidation to occur over the next several trading days. Longer term, I believe that gold has much further upside from here and long term investors should not be concerned by a pause or consolidation of the rally.

As for the gold miners, the action on Tuesday was ugly. The start was great, with GDX, the Gold Miners ETF, opening at its highest point since the rally began in July. But news from Syria was a double edged sword. Political instability and the threat of war are good for gold, and metal prices rallied. But the potential for a disruption in the supply of oil sent that commodity's price higher. Oil for diesel fuel is a significant consumable at every mine. The escalation of mining costs over the past several years is frequently cited as the reason for the gold miners having so significantly underperformed the metal. Tuesday's rally in oil caused a broad diversion in the prices of the metal and the miners with GDX closing near its low for the day, creating an outside reversal. The gold miners may have begun a period of consolidation. This should create a good entry point after a few more days of consolidating the recent gains. A drop to the 50 day moving average with support at that level would be a signal to add to miners.