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3 Reasons Gold Could Scream Higher

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"After faking a move lower, gold futures have broken above resistance, posting the first higher low since early July. This could be a significant short-term bottom—especially since it was preceded by a false move lower."

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Over the past week, gold has gone from zero to hero, breaking off an $80 run in just five trading days.

I've been bearish on gold since earlier this year. But I think this move could have legs. In fact, gold stocks might even move significantly higher before we finish out the year.

Here are the clues indicating gold might be undergoing a change of character:

1. Fake-Outs Lead to Breakouts

On Oct. 15, gold futures plummeted to a low of $1,251. This drop signaled a clear break below critical support at $1,275. That morning, it looked like the floor was about to drop out. I suspected gold futures would soon test their late June lows of $1,179. . .

That's when buyers stepped in. Futures haven't looked back since. Here's where we stand now:

After faking a move lower, gold futures have broken above resistance, posting the first higher low since early July. This could be a significant short-term bottom—especially since it was preceded by a false move lower.

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2. Miners Try for a Double-Bottom

If you want to find an asset class performing worse than gold this year, look no further than gold miners. Investors have slammed these stocks all year. The group is down nearly 44% on the year. No one wants these stocks. . .

However, the chart is beginning to look constructive. . .

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The miner to metal ratio has been dismal all year. If this bottom holds, we could see miners snap back in a big way…

3. Sentiment Is in the Gutter

Just 10 days ago, CNBC's gold sentiment survey revealed 83% of those surveyed were expecting prices to fall. That's way too lopsided. Whenever you see sentiment get to these extremes, it's time to start looking for a big move in the opposite direction.

So what happens next?

I think gold (and miners) can move higher from here. It will be messy. There will be big down days mixed with the initial thrusts higher. But right now, gold appears to be setting up for a solid fourth quarter.

I'm not ready to declare blue skies and new highs in gold's future just yet. But something is brewing right now that could spark a significant move. If you're nimble and you don't mind big swings in both directions, this is your time to trade. . .

Greg Guenthner
The Daily Reckoning


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