Gold Charts Suggest That
Decline May Not Be Over Yet
By Przemyslaw Radomski, CFA
Street Journal had an especially colorful metaphor to describe what has happened
to the price of gold that fateful week when
tumbled 13% in the two sessions through April 15, the biggest drop in 33 years.
“Slick with the viscera of crushed gold bugs, the world’s trading floors
look even more treacherous than usual.”
Do we feel like
crushed bugs? Not at all.
Do we think that
the bull market in gold is over? Not yet.
Do we know that
markets can be cruel? Hell, yes.
say the gold bears have been feeling lately like they have landed in a huge vat
of honey. They are smug, to say the least. But we see this as an opportunity to
get back into gold at a lower price and in the meantime,
we made money shorting some of the
downside (and on the
We are not alone. Jim Rogers, who foresaw the start of a commodity secular bull
market in 1999, said this may be the correction that gold needs. “If it goes
down enough, I will start buying it,” he told reporters.
publisher of the Gloom, Boom & Doom report, could hardly contain his glee at the
opportunity offered by the steep drop.
“I love the fact
that gold is breaking down because it will give a good entry point. The
fundamentals for gold are intact.”
He pointed out
that while gold may be down 21 per cent from its September 2011 high, Apple is
39 per cent lower than last year’s high. The S&P is almost 1 per cent higher
than its peak in October 2007, but over the same period gold is up 100 per cent.
given a garden variety of reasons for the decline. We have already covered some
of them in our
last essay. But there’s more - Goldman Sachs in an April 10
report reduced its gold futures forecast and made a self-fulfilling prophecy to
short gold, hurting gold sentiment and likely triggering stop-loss orders. (They
must be laughing all the way to the bank. Wait, they are the bank.) Cyprus said
it might unload 10 tons of reserves to help fund its bank bailout - the biggest
sovereign sale for several years. It stoked fears that similar gold sales may
be forced on other troubled Eurozone countries. Italy has the fourth largest
gold holdings in the world of 2,452 tons.
Gold prices have
been slowly gaining back some of the lost ground as traders and investors step
in to buy bargains. Since making the call that started the downward spiral
Goldman Sachs has covered its gold short this week.
There has been
strong demand for physical gold, especially from Asia, which continues to
underpin the gold market. Asia is witnessing one of the strongest waves of
physical gold buying in 30 years. Retail sales of gold tripled across China
April 15 to April 16, the China Gold Association said. The feverish buying has
left many of Hong Kong’s banks, jewelers and even its gold exchange without
enough gold to meet demand.
Is it time to be
already back in the market? Let’s take a
look at gold charts to find out (charts courtesy of
On the above long-term gold chart, we
see a pullback, which will be more visible when we zoom closer in our next
chart. A local bottom may have been reached, though it seems that further
declines are likely.
At this point,
this major long-term cycle is still several weeks away, and with the precision
of this cycle in the past, we expect that the final bottom will be seen much
closer to it than what we’ve seen recently.
Please note that
gold could decline to as low as $1,100 and still be in a long-term uptrend. In
fact, technically, it could decline all the way to the 61.8% Fibonacci
retracement level close to $900 and still remain in a bull market.
Let us now zoom
in a bit and see how the situation looks like from the medium-term perspective.
In the chart, we
saw a correction last week as gold’s price rallied first to the 38.2%
Fibonacci retracement level and after a brief pause, moved to
the second one (50%) – on Friday it closed slightly below it. Prices are
currently consolidating around this level and the correction could actually be
over. We have a situation where a moderate pullback was already seen – the bound
is no longer likely because it was already seen. The
RSI indicator reflects that – the market was extremely
oversold on a short-term basis, but it’s no longer the case.
We see that
volume levels were low on Wednesday when prices rallied, the same happened on
Thursday and volume peaked on Friday where the price actually declined, which is
not a good sign and suggests that further declines are likely.
Now, we’ll have a
look at Dow:gold ratio to see whether it indicates any important moves for gold.
Here, we see that
the ratio moved close to the declining
resistance line but didn’t really reach it. There is still some room
for the ratio to move higher. If gold declines to its previous low or slightly
lower, this declining resistance line will be reached, so basically further
weakness could be seen here. The important point here is: the Dow to gold ratio
chart does not imply a move higher for gold prices just yet.
up, generally this week’s
gold charts indicate that the yellow metal’s
decline is not over yet. To the contrary, it could
take a few more weeks before the rally really starts. There are also some
indications that the correction (within
the decline) is already over or close to being over.
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Have a great and profitable week!
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Seeing is believing.
All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
respective essays at the time of writing. Although the information provided
above is based on careful research and sources that are believed to be accurate,
Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
thoroughness of the data or information reported. The opinions published above
are neither an offer nor a recommendation to purchase or sell any securities.
Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw
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