What could possibly cause bullion quotes to fall apart here? Not much that I can see. Or even imagine. Someone in the Rick's Picks chat room said yesterday that he was looking for a powerful rally in the dollar, which would of course be a negative for gold and silver. But the only reason he could cite was that the dollar has become pretty oversold. Another chat room regular said more or less the same thing about gold-- that it is about to drop sharply to at least $750 because it has become very overbought. Both statements are true enough, at least on the long-term charts. But that is the hallmark of powerful trends ' i.e., that they tend to generate overbought and oversold readings that persist for much longer than we might expect. (Click on chart to enlarge) Of course, the terms 'overbought' and 'oversold' are relative and can be highly subjective. Look at the weekly chart of gold above and you can see that the futures generated an overbought signal in August 2005 that did not correct to fully oversold for 16 months. In comparison, the current upthrust in gold, begun from around $660 last August, has been meandering in the overbought zone without fully correcting since early September, or just five months. This suggests that the current bull cycle is only mildly overbought and that it could keep going until next January before Comex Gold gets as overbought as it was at the $732 peak in May 2006. The subsequent 25% correction took a while to complete, as you can see, and gold did not surpass the old high until September of the following year. But it was worth the wait; for, once the high was breached, bullion went on a tear, rising almost as steeply as the
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