By Jim Donnelly, Olson Global Markets

With the value of the dollar weakening almost daily, the price of gold has risen steadily since March. Former trend line resistance on the SPDR Gold Trust EFT (symbol: GLD), the largest gold ETF, was then broken above on September 11th with the price of gold rising since then. Although deemed a “crowded trade” by many market observers, a major test of resistance appears to be nearing for gold and corresponding gold ETFs alike.

Key resistance drawn off the March 13, 2008 high, parallel to trend line support dating back to 2005 suggests that the $110.50 area on GLD is major “channel top” resistance at the moment. With overbought conditions present on both stochastic and RSI (relative strength index) studies, the $110.50 level on GLD would normally represent an attractive level to take profits, trim positions and reduce exposure.

These are not normal times however, which makes the upcoming “channel top” test even more important and interesting. A solid close above $110.50 would be considered a key “breakout” to the upside which, in turn, could trigger “follow-through buying” causing another spurt higher to occur in the price of gold.

The failure to spark such a “breakout” however, would likely result in a correction to the downside that should be accompanied by a reversal higher in the value of the greenback. This key test should come soon and investors should be focused on it.

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By Jim Donnelly, Olson Global Markets

Amid renewed greenback weakness, the focus of those looking for dollar-induced inflation has been gold. When looking at the largest traded gold ETF (GLD) as a proxy, its price broke above key trend line resistance last week at the $97.50 level and inched slightly above that level to close at $98.67 on Friday.

While overbought conditions are now present on weekly charts, these oscillators are not yet excessively extended. This situation, which often accompanies a key “breakout”, suggests that more upside gains are likely to be scored as momentum buyers continue to buy and support the bullish case for gold.

With that in mind, a “measured move” extension drawn off key “channel bottom” support targets a move up to the $110 area for GLD. That roughly translates to a price of $1,125 for spot gold.

Of course, a solid break below former resistance (now support) at $97.50 on GLD would be a worry and could act as a big “yellow caution flag” for the bullish case.

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by Jim Donnelly, Olson Global Markets

One of the most ubiquitous “buy recommendations” lately has been to stock up on gold or gold equivalents. You hear it from numerous portfolio managers on the business channels. You hear it from infomercials, both on T.V. and on the radio. Heck, you even hear it at backyard barbecues and at the barber shop. The theory is that as the United States Treasury issues huge amounts of debt, along with ramped up debt issuance from a number of other European countries, an alternative place to park global funds is needed in order to preserve the “purchasing power” of cash. Thus, most commodity prices have been on the rise again including the likes of gold and silver even though short-term worries have been centered on price stability and the aversion to deflation.

When I called my broker last week and told him that I was considering buying gold after the dollar started to falter following a strong rebound from last summer’s weakness, he said to me, “Join in, everybody is into gold.” He went on to say, “I don’t know of anyone who is short gold!”

By itself, that assessment gave me reason to pause. But when another investment banker friend of mine said that one of his brothers-in-law (who happens to own three Harley Davidson motor cycles and has had seven new tattoos etched onto his back) was also into gold “big time”, I really began to wonder if a healthy percentage of the masses was already an owner of gold and various precious metals.

Nevertheless, concerns over the value of the dollar are now being expressed by the Chinese, the Russians, and from time to time, a number of OPEC nations. Hedge fund managers and currency traders are quick to point out the recent steepening of the yield curve is proof that there is an aversion to buying long dated treasuries. A number of well known bond fund managers are virtually saying the same thing.

While all of this might be true with the future value of the greenback in doubt, the current chart of GLD (SPDR Gold Shares), the largest Gold ETF, suggests that a correction lower maybe in store first. On long-term monthly charts, stochastic studies are still rising but are now considered to be in an overbought condition. In addition, a bearish MACD divergence on long-term charts suggests that buying momentum has been stalling. More over, it appears that GLD is quickly approaching a test of key trend line support (in green) at the $89.50 level.

If that level fails to hold as support, a larger correction to the downside may be in store instead. The “risk” is that a possible move down to key trend line support (in blue), which currently sits in the $70 area, might well occur over the intermediate-term and surprise a lot of gold bulls.

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