LONDON (Reuters) - With record-high gold moving further into uncharted territory, analysts who study past chart patterns to predict future behavior are getting acclimatized and see any correction as an opportunity to lengthen exposure.
Even as chart signals show signs of strain they say the market’s long-term uptrend is intact, in line with the dollar’s downward trajectory, with prices targeting $1,200 an ounce by the end of 2009 and an eventual target of $1,500 by mid-2010.
Gold has stunned bulls and bears alike, racing up some 30 percent this year to date and registering a record high at $1,149.15 earlier on Wednesday.
On a fundamental basis the market has found plenty of support, moving as a function of the dollar’s weakness. Central banks have come into play, with Asian giants China and India emerging as buyers, while worries about inflation have also brought out the metal’s attraction as a hedge.
From a technical standpoint, the rally looks tired. Gold’s Relative Strength Index (RSI), measuring the velocity and magnitude of price direction, stands at 81.7 on a 14-day basis -- a rise above 70 indicates that the market is overbought.
“Gold has been following a very regular type of pattern where it has surged over a short period of time each month before consolidating, correcting and surging again,” said independent technical analyst Cliff Green.
“Gold is the best technical pattern around,” he added.
After hitting $1,143.25 an ounce on Monday, the market showed slight vulnerability to the dollar's attempts to rally from 15-month lows versus a basket of currencies. .DXY
Dollar strength makes gold and other commodities priced in the U.S. unit less attractive to non U.S. investors. But the dollar’s gains proved fleeting and the market has kicked on strongly again having found decent support at the lower levels.
“It looks like a very well-behaved uptrend,” said Phil Roberts, analyst at Barclays Capital.
Gold has also woken up in other denominations. Gold priced in euros has hit its highest in almost nine months, while sterling-priced gold has also jumped to its highest since February.
For a graphic of gold in major currencies, click on:
ECHOES OF 2007, 2005
Chart watchers reckon initial support for gold is located in the $1,100/1,110 area -- a break of which could trigger a slightly deeper setback toward $1,060.
“Provided gold doesn’t drop back below $1,068 -- its bid,” Barcap’s Roberts said.
He noted that the pattern gold broke out of in September, when prices crossed the $1,000 barrier for the first time since February, resembled patterns the market broke out of in 2005 and 2007.
“Then, the move you saw was over the magnitude of 50 to 60 percent from the breakout level. That points to gold hitting $1,500 next year,” he added.
Commerzbank technical analyst Axel Rudolph put key support at $1,041.44.
“The problem is we’ve now accelerated since the end of October to such a degree that it can’t really be sustained. But the problem is gold often does these moves which are totally irrational and over-extends,” he said.
“Year-end $1,200 could be reached, but it could also be reached in two weeks if the last few weeks are anything to go by,” he added.
Turning to currencies, the 55-day moving average for the dollar index, measuring its value against a basket of currencies, .DXY shows no sign yet of its decline bottoming out. It's RSI at 42 has not moved into under-bought territory.
Adam Sarhan, chairman of New York-based Sarhan Capital, said the market’s overbought status could not be ignored.
He said investors would be wise to wait for a pullback toward support ($1,050) to add to their position.
“The recent action in gold reiterates our thesis that gold appears to be in the nascent stages of a new massive leg higher,” he said in a note to clients.
“We say this only because that is what the market is telling us and will continue telling us as long as it continues trading above 1065.”
Additional reporting by Frank Tang in New York; editing by Sue Thomas
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