Commentary for August 24, 2007

| August 24, 2007

The Gold Currency Index (GCI) has been trading in a channel since early this year, and a move well outside of this region will likely determine the direction of the next meaningful move. A slight positive divergence has developed between the GCI and gold in US dollar terms during the past several weeks, suggesting that the direction of the next trend will be up.

Notice how the GCI has been trending slightly higher since the end of June, with MACD momentum holding in positive territory before turning higher today. On the other hand, gold broke below support at the lower boundary of the uptrend from June and momentum dipped into negative territory.

Divergences between two sets of data that would normally be expected to agree closely are often reliable predictors of future developments. Since we created the GCI two years ago, divergences between it and gold have predicted nearly every major breakout and breakdown of the long-term trend, so we pay very close attention to them. Granted, the current positive divergence is very slight at the moment, but it warrants monitoring. We have now entered the seasonally strong period for gold, and a breakout from the channel on the GCI daily chart would be a major bullish signal.

Category: Commentary, Market Update

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