Gold may be on the verge of a significant price collapse.
Gold peaked at $1,900.40 on August 22, 2011 and has been in a waterfall decline since then. It is now approaching its short-term support level of $1,600. If this level does not hold the metal could plunge to $1,450 very quickly.
If the Europeans manage to hammer out an official bank/sovereign debt bailout plan over the weekend the Euro debt contagion fears that have been the primary cause for the rise of Gold from $1,400 in March to its peak of $1,900 will evaporate overnight, and without this fear factor traders will have one reason less to hold Gold.
Technically there is one very interesting set-up that has developed: the Bollinger Bands are pinching in on the price.
When we see this narrowing of the Bollinger Bands it is very often a precursor to breakout either to the upside or to the downside.
What makes us believe that we will see a downside break in the Gold price is the waterfall decline that began after Gold peaked on August 22. The recent price consolidation between $1,600 and $1,675 appears to be a pause before the second leg down in this decline.
If the price collapse does happen it will occur fairly quickly - over three or four trading days - this is how Gold corrects.
If you want to go short, go short today with a close above $1,700 as your stop-loss for you trade.
Always place a stop-loss on every trade: trading without a stop-loss is like skydiving without a parachute.
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Disclosure: I am short GLD.
