Gold Technicals: Will We See a Correction or $1,080?

After reaching a record nominal high of $913, gold has since retreated $33 to around $880. This quick drop was enough to sway sentiment and have many analysts talking about a correction in the gold market. This view is understandable, as the gold price has added $250 since September, and roughly $100 in the last three weeks alone. But let’s take a closer look at this latest upleg and compare it to the last upleg in order to get some perspective on what to expect from gold in the coming weeks and months.

The chart below analyzes the gold price over the past three years and includes the last major upleg that occurred during the same season two years ago.

While the past is not always a good indicator of the future and technical analysis is never reliable in isolation, the above chart is dense with insights and lends some interesting observations about gold and which way it might head from here.

First off, the current upleg has closely mirrored the previous upleg of 2005/2006. They both started around September, and grew out of a 9-month consolidation period. They also both consisted of two impressive advances separated by a short “breather” period in between.

The most revealing part of this analysis is that, assuming this upleg continues to mirror the previous upleg, it is nowhere near the top. The previous upleg put in a gain of 60% of 8 months and the current upleg, despite being quite impressive, has only advanced 33% in just over 4 months. For this upleg to run its course, we would see another few months of strong advances that could push the gold price towards $1,080. To add to the argument for further upside, momentum indicators show that gold is not nearly as overbought as it was at the peak of the last upleg and has room to run.

But just because the last advance was around 60% does not mean the current advance will necessarily follow suit. Market psychology, recession overhang, an election year, political instability, slowing jewelry demand, and Bush’s magical stimulus package could all help to paint a different story this time around. And the downside risk is substantial, as gold could easily correct to light support at $800 or all the way down to heavy support around $720.

My personal viewpoint is that gold will continue higher and if it does correct, support at $800 will hold. I took some profits when gold broke $900 and have cash on hand for a move in either direction. I will look to buy on a breakout above $913 or a correction towards $800.

In the meantime, as my readers know, I have and will continue to maintain a core position that rides this long-term bull market through the ups and downs. This gold bull has many years left and I fully expect gold to take out the inflation-adjusted high of $2,200 before the bull is over. And even after breaking $2,200, I will not be selling my holdings until the average investor is talking about gold the same way they were talking about tech stocks in 2000.

Comments

[Absolved:]

Well I cashed out at 910. I based my opinion on the leveling out I saw in the $INDU:$GOLD ratio. It seemed that people think stocks are a value play at these numbers and the downside risk is relatively low compared to gold. Just gamblin'.

Subster

2008 Jan 20 05:10 PM

[Jason Hamlin:]

Subster,

Gold is overvalued when it takes only one ounce of gold to buy the DJIA. For example, in the 1930s one ounce of gold at $35 bought the DJIA, and it did so again in 1980 when an ounce of gold was $850. Though this ratio has fallen from over 40 ounces in 2000, it still takes 15 ounces of gold to buy the DJIA, meaning gold is still relatively good value.

2008 Jan 20 09:46 PM

[pseydocyst:]

i see a correction coming, but
that's a good thing. This is a very strong
bull market.
Alot a people lost out when they bought
@ clearly very overbought levels @ 910-915.
When this thing comes down below 800
time to back up the truck.

2008 Jan 21 10:46 PM

[Toto-13:]

I say sell GOLD if you have it or don't buy if you don't have it. This commodity will be the last leg to drop and it seems everyone is already on it.
Rob,
WallastonInvestments.c...

2008 Jan 21 11:40 PM

[Do It!:]

Serious and realistic analysis! Question... if you have acquired the gold in swiss fr (744$)what will happen to the course of the gold in Europe, being expectable that $ will be still weakened for 4-6 months against sfr and €?

2008 Jan 22 09:55 AM

[growthvalue:]

IGRU.PK is having a investor call next week....should shed light on this gem set to double maybe more

2008 Jan 22 10:57 PM