While the price of gold has consolidated during the course of 2009 within a large pennant formation on a daily chart a look at the weekly perspective over the past two years hints at higher prices to come as a head and shoulder bottom formation has been put in place.
Gold tells the story of the credit crisis like no other. We can see that as the Federal Reserve began cutting the overnight lending rate from 5-1/4% in the summer of 2007 the yellow metal was set on a trajectory to carve out a new all time high. This move culminated as Bear Sterns collapsed in March of 2008 pushing gold to $1,033. As the market digested it's new all time high it formed the first shoulder of the reversing formation being monitored. Then in the fall of 2008 as the overnight lending rate was taken to ¼% gold dipped briefly below $700 an ounce as confidence in the Federal Reserve's abilities to lead the economy out of the valley of the recession peaked. This price action formed the head of the bottom formation. Moving into the first quarter of 2009 gold began to rally back towards $1,000 as uncertainty crept back into the markets and the Fed announced that it would begin monetizing the bond market. The subsequent rally and then failure of the psychological $1,000 resistance level formed the second shoulder to the reversing pattern.
Being that Gold has been rejected twice this year from the $1,000 resistance, a rally above that price on a weekly basis would be a buy signal for traders. From a weekly perspective the gold chart is emanating bullish characteristics as it has formed a head and shoulder bottom formation that portends for much higher prices once a close above the neckline is put in a place. The catalyst for a new all time high in gold could come from another sudden bank failure or a spike in the Consumer Price Index due to confrontation over Iran's nuclear program.
Bottom line gold is acting as a barometer for a rapidly changing world order as the price now stands firmly atop the previous all time high set in 1981 at $850.
