Gold’s 2008 correction lasted eight months and was followed by an upleg that regained all of those losses in half the time. Gold’s recent ascent from $700 to $1,000 over the past four months has been very rewarding for gold bugs that had the patience and discipline to hold their position or better yet, add to their positions while the chorus around them was calling an end to the gold bull.
I view technical analysis as just another piece of information worth consideration and inclusion in your investing worldview. It should not be viewed as a panacea by any means, but can be helpful alongside fundamental, social, political and historical factors. Disclaimer aside, let’s take a look at gold’s recent action.
The second assault on the $1,000 mark was met with much-anticipated resistance and gold quickly fell back toward the $900 level. This area proved to be solid support and has sent gold back to around $940 per ounce, where it sits today. Technical analysts have witnessed a very orderly ascent within a defined trend channel that has so far adhered to expectations. The bounce off the $900 level was extremely bullish as this was not only the bottom line of the trend channel, but was also the 50-day moving average and a key Fibonacci retracement level. Momentum indicators also bottomed and have turned North again, suggesting gold is ready to reclaim the psychologically important $1,000 level.
Not so fast gold bug. If we blow out the longer-term chart, we see that a double-top formation is in the making, which can signal a reversal in the long-term trend and be very bearish for gold.
But contrary to what many believe, simply hitting resistance on two separate occasions does not in itself constitute a double top. These formations can be tricky as the signal is not confirmed until key support is broken. The most important aspect of a double top is to avoid jumping the gun and instead wait for support to be broken in a convincing manner, usually with an expansion of volume. In other words, gold would need to fall below support levels at $900 and $875 before any pause for concern and would still require breaking support around $790 before confirmation of any trend reversal. Absent this development, the double top is inconsequential.
Combined with commitments from the Obama administration to rapidly expand the money supply, robust investment demand showing up in precious metals ETFs and an ever-increasing flight to safety among investors, I predict gold will be back above $1,000 within the next week or two. And this time, there will be no resistance, but rather gold will easily blast through this level and reach towards $1,100 in short order. While gold may linger in the $900-$950 range a bit longer, I believe this could be the last chance to purchase gold for three figures.
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