For the last week, all has been forgotten about the most popular reasons as to why gold is going to begin to rally to infinity and beyond. The old arguments that gold is about to go parabolic based upon the resurrection of "troubles in the Eurozone," massive amount of easing being engaged in by the Asians, or whatever was presented as the reason-of-the-week are now completely forgotten.
Now, we see articles that are calling for the death of the gold bull and the death of inflation, and others are pointing to the fact that gold is not money. Everyone, other than the perma-bulls, have become very negative about gold.
As for our long-time gold bulls, they are all enraged by this decline. Prior to this decline, you would hear them walking down the halls muttering about their conspiracy theories. Now, their heads are exploding. They have called the final bottom in this market more times than Dennis Gartman has changed positions on gold in the last two years. Some have even thrown in the towel.
Think about it. How many bull markets have you seen when a sizeable portion of the investment community expected it? So, while perma-bulls like Sinclair will undoubtedly come out and call yet another bottom in gold, it is when the public finally begins to view him (and others of his ilk) as "the little boy who cried wolf," and as effectively discredited after his 101st bottom call, that the next phase of the bull market will likely begin.
So, as I am sure you will read more and more articles about the fact that it is the paper market that has supposedly caused this recent drop, please do not be suckered into accepting excuses for lower prices in gold. In truth, while I was in the minority in expecting lower levels to be seen for quite some time, I did not expect us to be as low as we are now. But, oftentimes, just as precious metals see significant extensions to the upside on their strong rallies, they are equally prone to such extensions on the downside.
But, it is still sentiment that causes moves in the metals. And, we need the negative sentiment to run its course before we finally see a bottom in gold. But, at this time, I do not see that negative sentiment has bottomed, and more downside will likely be seen. In fact, not only am I expecting one more drop, I may even be expecting two more drops after an upside consolidation is seen after the next drop.
Last week, I noted that if we broke down below 138 in GLD, we can drop as deep at 127. And, since we opened on Monday below 138, it was quite clear to me that much lower levels were going to be seen. In fact, my next support region now rests between 124-127 GLD.
From a technical standpoint, I will usually look for multiple signs that a bottom may be in for a chart. First, I look for a completed Elliot Wave count. At this time, I only see us still in the middle of a 3rd wave, which still means, once we see one more decline to complete this 3rd wave, we can potentially expect a larger 4th and 5th wave within the pattern before a bottom is seen.
The next item I look for is positive divergences being seen on the 144 minute chart I use, as well as the daily chart. At this time, all I see is a positive divergence set up on the 144 minute chart, but none that I can rely upon in the daily chart. This leads me to believe that the next decline will only complete the 3rd wave, with a 4th wave bounce/rally to be seen after the next drop. It is the next larger 4th wave that should take enough time and cover enough ground to the upside to be able to set up a positive divergence on the final drop. This would likely mean that after the next drop, GLD could rally back to the 138-142 region before the final decline. However, a move through the 143 region would make me suspect a final bottom has been hit.
So, for now, I plan on buying the next 5 wave drop into the 124-127 region, and seeing how the rally which takes place from that region progresses in order to determine if a bottom has been struck or not. If all we see is a corrective rally, then the second decline which I mentioned as a possibility above will likely be seen to set up the final bottom in gold. But, as it stands now, I do not see a bottom being in for gold.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD over the next 72 hours. 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.