Gold Tilts Towards a Short-term Move Up
Based on the December 23rd, 2011 Premium Update. Visit our archives for more gold & silver analysis.
Why anyone would rather stuff their Christmas stockings with fiat currency than with physical gold is beyond understanding. To us "dash for cash" seems rash.
There has certainly been very little Christmas cheer for gold bulls recently. The beating is tough, but it's not the first time we've experienced it, nor is it likely to be the last in a secular bull market that has still has years to run. Gold takes four steps forward and then three back. We just have to stay in the game.
We have said it before: corrections are inevitable as death and taxes in a bull market since markets never go up in a straight line. By the time gold put in its most recent high on August 22 after its parabolic rise during August, it had logged a stunning 44% appreciation in calendar year 2011. And even after its recent fall, gold is still 22% higher than it was on its 2011 low, which took place on January 27. Without a doubt, gold had a white-knuckle year, starting at $1,412 an ounce, hitting a low right out of the gate of $1,314.
The past few months have been unkind to the yellow metal, to say the least. Gold tanked 13% in September and 8% in just three days last week as a strong dollar hammered prices. But still, we would much rather have gold jingling in our pockets this season than to be exposed in the stock market or worse, hold depreciating cash.
It's time to take advantage of the Holiday Season gift of cheap physical gold and silver. From both the fundamental and technical perspectives, gold remains in a bull market, and what we're seeing right now may be the best buying opportunity that we'll see in the following years.
Stress in the financial markets has not stimulated safe-haven gold buying but instead has weakened the euro and indirectly helped drag gold lower. Last week, gold futures climbed 1.3 percent on Friday, but still posted a 6.9 percent loss for the week, making it the biggest decline for gold in three months. Some were quick to pounce and declare the "end" of the bull market in gold, but many investors, including us, disagree. We are seeing end-of-the-year squaring of the books and sales of precious metals to lock in profits. Also investors are reducing positions to lower margin costs as the price falls. There is also the issue of protective stops triggering sales as support levels break down. These are all short term reasons for lower prices. The long term fundamentals for gold are still in place. The global debt deleveraging remains a work in progress. We see very little good news coming out of Europe and the situation is unlikely to improve in the short to medium term. The European Central Bank's solutions will only buy time; the debt issues will not go away. The U.S. economy remains lackluster and additional deterioration in Europe will make things worse. We would not be surprised to see further quantitative easing, or QE3, in early 2012, which would be bullish for gold.
To see if this is true for the short-term as well, we'll begin the technical part with the analysis of the yellow metal. We will start with the very long-term chart (charts courtesy by http://stockcharts.com.)
A look at the very long-term chart (if you're reading this essay at www.sunshineprofits.com, you may click on the above chart to enlarge it) reveals that gold has broken down below the rising support line.
Much has been written recently about gold's breakdown below the rising support line. But, is the technical picture for gold really bearish? No, it's not, and the above chart has been created to prove it. One of the reasons is described right on the chart - gold quite often consolidates in a way similar to what we've seen in the past months. We're not in uncharted waters - we're seeing a quite common pattern in play. However, the most important point - something that deals directly with the breakdown mentioned in previous paragraph - is not described on the chart at all.
The key action that one should take before applying any trading technique is to check if it at least worked in the past. At this moment, you might want to take a few seconds and check the bearish gold analyses that you've read recently which include charts that cover the 10-year or at least a 5-year time frame. Anyway, this is not the first time that we're seeing a breakdown below a rising medium-term support line. We have marked the current support with a gray, dotted line. Other gray lines represent analogous lines in the past - ones that were viewed as key support some time ago. Please take a few moments to examine them and to check what followed the previous "breakdowns".
What followed was not a plunge that erased the whole bull market. It was not a prolonged consolidation either. The fact is that similar "breakdowns" have been (in all cases seen on the chart) followed by the final bottom of the consolidation (not to far below the line that is has broken), which was in turn was followed by a strong rally. In these cases, lower prices were never seen thereafter.
Please, recall what we wrote in our last essay on the mixed outlook for gold (December 14th, 2011):
In the past, when price levels did not pursue the level of the previous high, declines generally stopped close to the level of the original bottom and then rallied. This would coincide with our $1,550 target level from the bottom seen earlier this year, so there is a good chance that gold will rally if the decline takes it down this far.
This is precisely what we might be seeing now.
Based on the points made above, gold remains in a bull market from both fundamental and technical perspectives, and what we're seeing right now may be the best buying opportunity that we'll see in the coming years.
If the above chart doesn't convince you, there's more. Let's see how gold performs relative to corporate bonds.
We now look at the ratio chart of gold's price and Dow Jones Corporate Bonds. In the above chart, we compare the size of the current decline to the previous ones. Again, the recent move down is still in tune with previous price patterns. Please note that the ratio declined about 61.8% of its previous rally - just like in 2006. Moreover, the price is now slightly below the 50-week moving average - just like in 2006. The similarity between these two time-frames is quite striking indeed - please take one more look at the previous chart and compare the shapes of the 2006 and 2011 declines. The implications are clearly bullish and the recent price action of this ratio clearly appears to be a mid-term correction, nothing more, nothing less.
Summing up, although recent declines have been sharp, multiple signs suggest that the local bottom is in and higher gold prices are now expected. The precise target levels and their "probabilities" are a more delicate matter and require further consideration based on the full spectrum of our analysis.
Thank you for reading. Have a great and profitable week!
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