Dear Friends,

Gold continues on its steady path higher breaking into one new record high after another with the passing of each day. In nominal terms, we are left with nothing on the charts to indicate resistance areas other than projections from various technical methods. The fact is that the Dollar is so weak technically, and inflation expectations are rapidly increasing at such an alarming rate, that buying momentum in gold shows no sign of stalling, even after its strong gains of the last couple of weeks.

From a trading perspective, ascertaining where a new resistance area may surface can be a bit challenging when a commodity is in uncharted territory. Ever since gold broke out above the old chart high near $1,070, we have had little to base price projections upon. A method that we can use that will provide us a certain degree of reliability is analyzing the inflation adjusted gold price. For that reason, I am detailing that chart along with some markings that can give us a bit of a road map as we witness history in the making.

You will note that gold has already bettered the 50% price retracement level on an inflation-adjusted price basis. In addition it has now taken out the last line of horizontal chart resistance based on a swing high. The region centered near the $1200 level corresponds to a 61.8% retracement of the entire bear market decline coming nearly 30 years ago. In technical analysis, should a Fibonacci level fail to hold a rally or stem a decline, there is a strong tendency for markets to move to the next level of resistance or support, which in the majority of cases, is to retrace the entire move, either up or down. That would allow gold to actually target a move to near $1770 – $1750 in nominal terms, which is the highest monthly CLOSING price on an inflation adjusted basis.

Also, please note the Yen priced gold chart for some further confirmation of market psychology shifting decidedly to inflation and further away from deflation. When the dam broke in the financial derivatives world back last year in July, the yen carry trade began a violent unwinding as deflationary fears erupted. That took gold down in price while the Yen rallied as traders rushed to buy back short Yen positions. The result was that gold dropped very sharply when priced in terms of the Yen. Note the remarkable difference a year can make as you look over the price chart. The fact that gold is moving higher even in yen terms tells me that the inflation psychology is now globalized and is not contained to any one particular nation. See what fury the Central Banks of the world have unleashed upon us all.

Click charts to enlarge in PDF format with commentary from Trader Dan Norcini