On August 22, 2011, I published my first article on gold here on Seeking Alpha entitled "A Different Perspective On A Top For Gold." In that article, I presented a multi-century Elliott Wave analysis of the gold market, which suggested to me that the next Fibonacci extension of $1,915 could very well be a local top for gold, while most investors were looking to break out over $2,000 at the time.
On Tuesday, August 23, gold hit the $1,913 level, and immediately reversed. I published further articles immediately thereafter calling for a drop as low as the GLD 145 region before a potentially parabolic rally could begin.
On December 27, 2011, I published another article on Seeking Alpha, "Gold At $2,000: Coming Sooner Thank You Think," within which I surmised that the "significant bearishness is potentially marking the bottom or near bottom of the gold market rather than the start of a larger bear market in the metal." Immediately thereafter, GLD spiked down to the 148 region, and strongly reversed. Although this is slightly higher than the ideal target bottoming level I provided months before, it seems quite likely that GLD has bottomed for now, and has begun the strong rally we expected would ensue if support was held within this region.
The common perception among the "fundamental" analysis community is that gold will move in an inverse correlation to the movements of the USD, which evidences gold's primary utility as a hedge against inflation and protection against the loss in value of the USD.
However, I believe that the recent action of both the USD and gold could dispel many of this specious notion. In fact, if one were to compare the movements of the USD and gold since the end of December, we would recognize that there really was no correlation at all. The USD has moved both up and down during this period, while gold has only moved in one direction - up.
Unfortunately, both the technical and fundamental analysis camps look for actions in one market to suggest the direction of movement in another market. However, simply because there seems to be a correlation between certain markets for a period of time does not mean that there really was any form of causal relationship. When the seeming correlation disappears, it provides us with the evidence that there really was no true correlation or causal relationship at all.
In our example, the USD and gold were simply trading in opposite directions to each other for a period of time, without any causal relationship, evidenced by the recent upward movements of both markets concurrently.
Although there are many that will disagree with this proposition, I would suggest that you take a step back, and ask yourself what has changed that would make the USD rise while also making gold rise? If you were to truly view this from an intellectually honest perspective rather than attempting to fit a square peg into a round hole, you would recognize that nothing has changed "fundamentally" which would make the USD move up along with gold, as it did after gold hit its target region bottom, and which it has also done in the past.
Therefore, we simply cannot rely on the USD for market direction in the metals market. Furthermore, I am hoping that investors learn to analyze each market on its own merits, and not attempt to utilize a seeming correlation to predict the movements of any market. Just as easily as seeming correlations appear, they disappear without warning, leaving the investor wondering what had happened. Therefore, I highly suggest that investors analyze each market on its own merits when making an investment decision.
While GLD bottomed a little above my ideal target level of 145, the action in the gold market is highly suggestive that the local bottom is in. This now turns our focus towards a potentially strong rally that can take gold past the $2,000 level quite quickly, as was proffered in the last gold article published on December 27, 2011.
However, based upon the overall pattern in GLD at this time, we should see some form of pullback/consolidation in this market, which should maintain support over the 163 level. If the market can maintain support over that level over the next week or so, then we can see an exceptionally strong move up in the gold market over the next month, which will be taking us well on our way towards the $2,000 level in potentially dramatic fashion.
Disclosure: I am long GLD.