Wall Street Journal
had an especially colorful metaphor to describe what has happened
to the price of gold that fateful week when the yellow metal
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 I feel like a crushed bug? Not at all.
Do I think that the bull market in gold is over? Not yet.
Do I know that markets can be cruel? Hell, yes.
Needless to 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 at my firm, 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 pullback). 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
Marc Faber, publisher of the Gloom, Boom & Doom report, could
hardly contain his glee at the opportunity offered by the steep
"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% from its September
) is 39% lower than last year's high. The
(INDEXSP:.INX) is almost 1% higher than its peak in October 2007,
but over the same period gold is up 100%.
Pundits have given variety of reasons for the decline. We have
already covered some of them in
Silver's Final Bottom Is Not Yet In
. But there's more:
) 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. (GS must be laughing all
the way to the bank. Wait, it is 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 get back in the market? Let's take a look at gold
charts to find out (charts courtesy of
Click to enlarge
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
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.
Click to enlarge
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
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
(INDEXDJX:.DJI):gold ratio to see whether it indicates any
important moves for gold.
Click to enlarge
Here, we see that the ratio moved close to the declining
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
that the Dow:gold ratio chart does not imply a move higher for gold
prices just yet.
Summing 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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