Long secular bull markets in any asset class tend to fool us into believing their prices only go up. Tulip bulbs, Beanie Babies, baseball cards, Florida real estate, internet stocks. And they do only go up and it's exciting - until their bubbles implode.
Gold has one of the clearest patterns of long trends in both directions that convince investors they are endless.
Gold bugs suffered through a 20-year secular bear market when gold plunged 70% in value from an exciting record peak of $850 an ounce in 1981 to a low at $250 an ounce in 2001. By that time gold was thoroughly despised and out of favor.
However, at that point it then launched into an exciting 10-year bull market in 2001 in which it rose from that low of $250 an ounce to its next record peak at $1,900 an ounce in August, 2011.
That long-term bull market appears to have ended with a temporary reversal to the downside in 2011, a recovery back up but to a lower peak last October, and a more serious plunge since that has gold down 24% from that peak, officially in a bear market.
The consensus of the technical indicators we use in our research triggered an intermediate-term sell signal on October 15.
However, the expected intermediate-term correction has been taking on an increasingly more serious appearance.
Gold had been in a pattern of lower highs on its rally attempts and lower lows on its pullbacks since October, until it eventually plunged sharply several weeks ago. That plunge of an additional $203 an ounce in just two days finally caught the media's attention.
It also suddenly had gold very oversold beneath its short-term 30-day m.a., and had many convinced, or at least hopeful, that the correction was over.
Perhaps it is.
But my take on it was that the additional plunge was sure to create another rally attempt off the oversold condition, but one that was likely to be only a brief bear market rally that would run into serious resistance at the 30-day m.a. again. That m.a. is around $1,480 an ounce. Gold's rally seems to already be stalling in that area.
Unless there is a clear breakout through that resistance, our work is saying that gold will continue to be a tarnished asset for a while yet, with lower lows still to be seen.
The risks and negatives for gold are not only coming from the charts and technical analysis.
On the sentiment and fundamental sides, we expect there are a number of gold investors who were shocked by the large decline since the peak at $1,900 in 2011 but did not sell, who are now watching this latest attempt to rally closely, and if it begins to fail will be anxious to join in the selling this time to avoid further losses. At the same time the traders who jumped in on the oversold condition for a quick trade are likely to begin taking their quick profits on the first sign the rally is failing.
Meanwhile, major international banks that were previously bullish on gold have been turning bearish and dramatically cutting their forecasts.
And gold mining companies have been significantly cutting production and exploration efforts, not a sign that they believe the price decline is only temporary.
Put it all together and we expect our sell signal to hold for quite some time yet, with new lows under $1,300 an ounce during the summer.