Seeking Alpha
Newsletter provider, portfolio strategy, macro, gold
Profile| Send Message|
( followers)

As a long-term investor, I don't spend much time looking at or thinking about technical analysis, however, I'll be the first to admit that it plays an important role in short-term moves for just about any market.

But, one of the things that I've come to learn over the years is that head-and-shoulders patterns are one of the most powerful forces in nature - perhaps as powerful as compound interest, what Albert Einstein once referred to as the most powerful force in the universe.

In any event, after watching precious metals get mauled again today for no apparent reason (this is becoming an almost daily occurrence) and, after pulling up a long-term chart for the yellow metal at INO.com, it occurred to me that there may be a developing setup for an inverse head-and-shoulders bottom as annotated below.

(click to enlarge)

Now, the good news here is that, if the other shoulder forms, that means that the correction that began 15 long months ago could soon come to an end and the gold price will f-i-n-a-l-l-y break free of its $1,550-to-$1,800 an ounce shackles.

This could put the yellow metal back up over $1,800 in relatively short order, on its way to new record highs sometime next year as many are predicting.

Contrary to popular belief, a resolution like this would make the current gold price correction about an average one when looking back over the four or five major corrections that have occurred since the secular gold bull market began a dozen years ago - about 18 months long.

Of course, the bad news here is that technical traders (and whatever other forces are currently operating in this market) might push the price even lower from its current $1,650 an ounce level. Given what's happened over the last few weeks with support having clearly given way and long gold futures traders fleeing, that now seems more likely than not.

How much lower is the key.

At this point, a $1,600 price wouldn't be surprising and my guess is that if it dips below that level, it won't stay there very long.

Of course, the really bad news here is that this might not be a head-and-shoulders pattern at all. With a decisive break below about $1,550 an ounce, this could be just one more low in a series of lows, what some refer to as a bear market.

Investors in exchange traded gold funds such as the SPDR Gold Shares ETF (NYSEARCA:GLD) don't seem to be in any hurry to sell as the gold holdings there have risen as the price has tumbled in recent months, now just two tonnes below the record 1,353 tonnes set less than two weeks ago.

While lower prices may be painful for new gold investors who made purchases at higher prices over the last year or so, this developing setup for a head-and-shoulders bottom will probably soon ease their pain.

Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also own gold coins.