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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Has Gold Lost Its Glitter Again?

Commodities / Gold & Silver 2009 Dec 11, 2009 - 02:29 PM GMT

By: Sy_Harding


Best Financial Markets Analysis ArticlePeriodically through the bull market for gold that began in 2001, after gold has rallied significantly off an intermediate-term low the media belatedly picks up on what has happened and becomes very excited about gold and its prospects. That’s usually an indication that the intermediate-term move is just about over, with one more spike up created by additional investors getting caught up in the media’s excitement, and jumping in.

With long-term forecasts that gold will someday be at $2,000 an ounce or $3,000 an ounce it may work out long-term to buy at an intermediate-term high. But it’s very difficult to hold onto gold over the long-term due to its volatility. So even in a bull market for gold, gold investors are often subject to whipsaws, buying near intermediate-term tops only to see gold plunge quite sharply, forcing them to bail out with losses when the media then turns sour on gold.

I much prefer to invest for the intermediate-term moves, periodically taking profits when pullbacks threaten, and have been successful enough at it over the last 22 years to be quite frequently ranked in the Top-Ten Gold Timers in the U.S.

The most recent excitement for gold began in October when it broke out above the resistance around $1,000 an ounce, resistance that had halted each of its previous four rallies of the past two years.

On that breakout, forecasts became widespread that gold would reach $1200 an ounce, a 20% further gain, sometime in the first half of next year. However, in the excitement money poured into gold so fast that it reached that goal in a matter of weeks.

Two weeks ago, gold bugs who had been forecasting $1,200 an ounce excitedly raised their targets to $1,500 and $1,600. When analysts at some Wall Street firms jumped on the bandwagon and began to also forecast $1,500 the gold bugs remained in front by hiking their forecasts again, to $2,000 and even $2,500 an ounce.

With that, I said (to my subscribers), “Perhaps over the long-term, but the problem is what might happen in the intermediate-term on the way to the long-term, particularly given the way gold has surged up to a fairly significant overbought condition above its 30-week moving average.” (It was that same spiked-up overbought technical condition that had provided the warning at the previous rally tops).

And sure enough, just two days later the bottom dropped out of gold. In just six trading days, from Friday to Friday, it plunged $118 an ounce, from its record peak at $1,226 to its intraday low this Friday at $1,108.

We gave our subscribers two potential support levels that might stop the decline. The first was at gold’s short-term 21-day moving average, which was at $1,144, and if that was broken that next potential support would be at the intermediate-term 30-week m.a., at $1,010 an ounce.

Since the 21-day moving average failed to provide support, gold breaking below it mid-week, I’m not expecting gold’s correction to end until it reaches its 30-week m.a., around $1,010. We’re also likely to see the media more soured on gold before it reaches its next low, more likely to be pointing to its negatives than awaiting the resumption of its upside.

Of course I could be wrong, and a lot of traders think I am and have been trying to catch the bottom by jumping back in almost every day this week. That has created a number of brief rally attempts almost every day. But so far, before the day is over those anxious traders have been handed their heads as gold reversed and declined to a still lower low.

I advise more patience. If gold is indeed going to $1,500 or $2,500 an ounce the difference between getting back in at $1,010 or $1,125 will not be as great as the damage that can be done by being whipsawed a few times jumping in prematurely.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website, and the free daily market blog,

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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