James  Hyerczyk

Tuesday’s comments by Federal Reserve Chairman Ben Bernanke and conventional technical analysis suggest that gold may be poised for a rally. On Wednesday, Bernanke will complete his testimony before Washington lawmakers where he may offer more insight into the state of the U.S. economy. His words could generate the momentum the gold market needs to breakout to the upside.

On Tuesday, Bernanke presented a gloomy assessment of the U.S. economy that may have provided clues for investors that the Fed is poised for more monetary easing. His downbeat assessment of the economy left open the door for additional quantitative easing although the Chairman did not outline any specific stimulus plans.

In his testimony, Bernanke did not give any clear signals as to the Fed’s intentions. At times it seemed he was reiterating the statement generated by the Fed monetary policymakers at its June meeting. Nonetheless, the U.S. Dollar softened a bit and gold rallied which could be a precursor of events to come.

If additional quantitative easing is implemented, the dollar should weaken further, giving gold the boost it will need to breakout to the upside. QE is categorized as a dollar-negative move because it floods the market with currency.

The daily December Gold chart pattern suggests that the yellow metal may be setting up for a massive rally. Currently, gold is trading inside of a descending triangle chart pattern. According to technical analysis of chart patterns, the descending triangle chart pattern is a non-trending pattern.

The highlight of this pattern is the compression of prices by the combination of the flat support line and the gradually declining resistance line. This chart pattern is often indicative of impending volatility so investors should brace themselves for a potentially volatile breakout over the near-term.

What will be the catalyst of this potentially volatile move?

Since gold is considered a store of value during economic turmoil, investors may return to it as a safe haven investment as the reality of another recession becomes clearer. Lately, investors have been treating gold as both an investment and a reserve currency.

James Hyerczyk

James Hyerczyk is President of Pattern, Price and Time, LLC

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