April 10, 2010 – Gold climbed $36.00 this past week, a substantial 3.2% weekly gain. Importantly, gold has finally hurdled above resistance around $1140. In fact, it literally blew right through it.
It has been nearly a month since I wrote that we should “note how strong gold has been throughout this correction.” Even though gold at the time remained stuck below $1140, I believed its trading action to be “very significant because it signals the power of the underlying demand for physical metal.” As a consequence, I concluded back then that the demand for physical metal “will soon send gold hurdling above $1140 and to overhead resistance around $1200.”
Importantly, that demand has not diminished. It continues to drive gold higher, so look for $1200 to be reached soon, which is an outlook confirmed by the gold chart. Gold’s chart patterns remain very bullish.
Look closely at the upper right-hand corner of the above chart in order to focus on the trading pattern that gold has etched out in recent weeks. Gold has formed a clear “head & shoulders” pattern, but look closely at the ‘head’ of this pattern. Unbelievably, gold has also formed another H&S pattern within the ‘head’ of the larger pattern.
H&S patterns typically signal that a base is being formed. So the patterns in the above chart provide visible evidence of the accumulation now occurring in gold. This chart is very bullish, but there is always reason for caution.
As gold climbed higher this past week, open interest on the Comex has soared. Clearly, the gold cartel tried to stop gold at $1140 again, but this time they failed. However, if they continue to offer paper at the same rate, the gold cartel may shake out some weak players on the Comex, which could cause a correction in the gold price back to test support at the $1140 break-out level.
Regardless of the frantic efforts by the gold cartel, the demand for physical metal has not diminished. Even with gold’s big jump this past week, buyers of physical metal are still accumulating, which is not hard to understand. Given the ongoing financial crisis and growing sovereign debt worries, the integrity of government promises and other debtors is becoming increasingly doubted. So tangible assets like gold are being accumulated as a simple and practical way to avoid the risk of financial assets.
In the final analysis, the demand for physical metal always drives the gold price. Consequently, if the paper shorts are unsuccessful in driving the gold price lower, they have to deliver metal, buy back their shorts, or default.
A default would mean ‘game-over’ for the gold cartel, and as a consequence, the gold price would soar much higher to its free-market level. The gold cartel obviously doesn’t want that outcome, so they are stuck with only one alternative. The gold cartel must keep selling paper in an attempt to cap the gold price in the hope that the gold price will climb only a little before the demand for physical metal subsides. In that way, the gold price would fall back in a correction, and the gold cartel would use that opportunity to cover this week’s new shorts.
Given that the market is becoming increasingly aware from GATA’s efforts that the gold cartel is a naked short, it is unlikely that the demand for physical metal will subside here. I expect in fact that it will continue to grow. After all, what would you rather own? Physical gold, or a piece of paper purporting to represent your ownership of gold? Or a comparison even more stark, would you rather own physical gold or the debt of Greece, UK, Spain, the US or any other overleveraged debtor?
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