Strong momentum

Now that gold is more than 5% above its downtrend line, few would doubt that the yellow metal has made a legitimate breakout and is on its way to test its May 2006 peak.

Given that gold has essentially shot straight up after breaking out on Sept. 4 and that any pullbacks since then have been mild, intraday ones, we may well see a period of consolidation around the 26-year high at $730.

Silver, after a brief pause at its now rising 50-day MA, has surmounted it. Next resistance is near the downtrend line and 200-day MA at about $13.25.

The gold and silver miners indexed by the GDX exchange-traded fund are also plowing ahead. GDX may be expected to challenge recent highs around $43.

The U.S. dollar index has dropped below recent lows around the psychologically important support level of 80, beneath which lies uncharted territory for the greenback.

The dollar is poised to break down from a year-long falling wedge. As such a formation is usually bullish, a breakdown from it could catch those expecting a reversal to the upside on the wrong foot, adding impetus to the decline. We shall see.

If a breakdown does happen, gold -- which, as the chart shows beautifully, has a habit of moving inversely to the U.S. dollar -- is likely to soar.