More than two and a half months ago I published a post about gold where I discussed that it is not time for gold to shine yet. I was right, gold sold off pretty aggressively but couldn’t continue even though it had every chance to do so. This kind of fake breakouts can lead to even stronger breakouts but usually in the other direction. So, can gold use this opportunity to break out of this 5-6 long bear market and start an epic rally?

In this post let me present what would have to happen in order for gold to become one of the most wanted assets in the world again.

First let me start with the dollar. I wrote extensively about it lately so please go ahead and start with my latest post. Many dollar bulls are saying that one shouldn’t worry as DXY is only heading to fill the Jan 2015’s gap. They could be right, but please read my post above what would make me change my mind to become a dollar bull. Anyway, if we assume that the dollar continues to weaken from here this should provide a huge tail wind to the shiny metal.

Next thing I would like to focus on is the COT positioning of precious metals (gold, silver and platinum) as a group against the equally weighted average price of the group. The chart of the average price looks similarly to the gold chart so I won’t show it separately here but one can also see it in grey color on the chart below; would you like to see it separately, please drop me an email. Anyway, hedge fund positioning (in blue) is at historic lows and usually it serves as a good contrarian indicator. cot_gcsipl

A very important thing to note is that the gold price in dollar terms, as discussed in the post about gold, is still below 1300 level. While this is the case we have to be very cautious about calling this breakout to happen to the upside but if I focus on technicals now, this is the first and probably the most important level to watch. Only when the price closes above $1300, we could start thinking about a major breakout.

The COT positioning and potential for continued weakness in the dollar are suggesting we could be anticipating it but not take it as given!

The next chart I would like to show you is gold price in EUR. It amazes me when people analyze commodity prices in USD only even though major commodities trade everywhere around the world.cm Gold EUR Gold in euros is trading just below a crucial resistance at €1085 level. In order to see gold rally, we have to see it close above the €1085 level!

We could also argue that such a strong euro is hurting gold right now. Should the price start breaking lower through the rising trend line (on the euro chart), then all bets about a bull run should probably be taken off the table!

I started with precious metals as a group, I should say something about platinum and silver as well. Silver (red) needs to clear $16.85 in order to rally and it seems platinum (blue) wants to move higher already. si_pl

The next chart I would like to show you is the USDJPY price chart. As you might know, USDJPY tracks gold closely. It has an almost perfect inverse correlation, so when USDJPY trades lower gold trades higher and vice versa. Similarly to precious metals, hedge funds are very exposed on the short side in JPY. Everyone I talk to expects USDJPY to trade at 160 or even 200 in the future.. but what if the price action surprises everyone and falls? JPY (DFB)If you are a bull this might be a perfect time to buy it, but based on all the evidence I wouldn’t be surprised if we see a break lower and thus strength in gold as well.

To conclude let me say this, many more experienced people have tried to call this breakout a few times in the last couple months but the price proved them wrong which just confirms that the market clearly has many hurdles to overcome. On the other hand gold had a great chance to fall apart recently but it held which tells me there exists an underlying buying pressure which keeps the price together. At the moment all charts mentioned above sit at crucial levels where many people could be caught off guard. So as mentioned above, gold has a great chance now, can it use it? If not, watch out below…

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