Precious Metals Ready for Another Run

Gold futures pulled back in a steady decline, after reversing at $1,000 on Feb. 21, and gave up a good chunk of the post-October recovery rally. The contract broke six-week support at $900 on Wednesday and sold off to $882 about three hours before the latest Fed rate decision. That dip marked the low tick of the four-week correction.

The contract went vertical after the 2:15 p.m. announcement, as market players interpreted the latest Fed liquidity efforts as highly inflationary. In addition, the buying spike spread through the industrial commodities, including copper, steel and crude oil. Thursday and Friday brought little relief, with all groups heading into the weekend near their highs.

The reawakening of commodities in the middle of a worldwide slowdown could trigger a major episode of the law of unintended consequences. On the one hand, we might see raging bull market in the commodities and related equities that drove the raw-materials rally in early 2008. On the other hand, the rise in core prices could have a devastating effect on demand creation in the post-crash environment.

However, this turn of events should be great news for the trading community, because greed-driven buying pressure has been a missing element in the equity markets for many months. The reintroduction of steady uptrends into the mix of collapsing stocks should provide welcome relief and contribute mightily to 2009 profit production.

Gold Futures -- 120-Minute Chart eSignal

Precious metals are the place to start our hunt for profits, because gold is setting up for another test at $1,000. Note how the recent decline tagged the 38% retracement of the October to February rally and closed Friday at the 62% retracement of the monthlong correction. This is a natural spot for a consolidation and pullback to test last week's gains.