By Rudi Filapek-Vandyck
It would seem currency markets are reviewing their responses to global economic data with more signs of reduced economic momentum in the US starting to weigh on the US dollar. If, and this is at this stage still an “if”, this becomes the new trend many an investor will be in for a big surprise, no doubt.
Until now, reduced risk appetite has continued to feed into a stronger US dollar, which in return has kept a lid on commodity prices, including precious metals such as gold and silver. But what will happen if the correlation between risk aversion and the greenback weakens (not to mention the possibility of a reversal)?
It is but one reason why some investors are once again feeling their heartbeat accelerate when talking about gold's prospects.
Another reason is because the precious metal (or should that be: non-fiat currency?) has now carved out a so-called “cup with handle” technical pattern on daily price charts.
It turns out, this has the technicians excited as cup-and-handle figures are usually seen as a signal the price is about to break out to the upside. And it just so happens to be that gold has a long history of carving out cup-and-handle technical signals.
The present formation suggests a technical target of US$1380/oz.
Unfortunately, such a signal stimulates positive anticipation, but it provides no certainty. Technical analysts at Canadian stockbroker Shaw have done some historical research into the matter. Their conclusion is that most of the time a cup-and-handle pattern is a good indicator for a future break-out to the upside, but sometimes it is absolutely not.
In 1974-1975, for example, the price of gold simply kept on going sideways after putting a cup-and-handle formation on price charts, with the price gradually trending lower.
In 1980, a sell-off followed and the price ultimately ended below the bottom of the cup.
In 1983, the subsequent price response was similar to 1980, with the difference that the bottom of the cup proved strong enough resistance to prevent gold prices from falling into the abyss.
These three examples are being offset by many more examples of a positive extension to the technical signal, including 1978, 1995, 2002, 2007 and 2009.
Now what about 2010?
