Long Term, Gold Is On Its Way Down

I figure this article upsets the apple cart in the gold bug community but, gold is worth looking at. After all, if it rallies or falls, someone is talking about it, various stocks and sectors respond to it and enough chatter follows. On Friday, it came very close to breaking a major, major, major support but bounced.

So the question is: where does it go from here? Well, let's analyze this technically, like I did with crude the other day. Before we begin though, the process that I use to determine golds trend is threefold: First, from a day to day trading perspective, second, from a long term chart perspective, and third, from an inflation perspective.

First, from a day to day standpoint, gold is very oversold. One of my indicators shows the yellow metal is the most oversold since the collapse from 1000 in March. One could look at this in two lights. First, gold never recovered from these highs, or conversely, maybe the second time is a charm and the metal rallies?

Personally, I think it is a change in sentiment. Before the major fall off in March, we had not seen a sell down as aggressive as that plunge from 1000 since June of 2006 which is basically almost 2 years prior. Now we have two of them within 6 months. I know that index funds have been unloading these positions, which explains why we have not bounced. The problem for gold though is that it took a long time for the funds to get into the commodity market. If they are dumping today, when will they come back? It won't be tomorrow!

From the chart side of this equation, we bounced right in front of both my intermediate and long term support position, which resides at 850 (low as 857, finished at 864). I would argue that since we are here, a test of 850 will probably occur and if it breaks, the next level of support resides around 770. For those of you keeping track at home, that would be a 25% decline from March. In between that though resides the mighty 65-week at 825 and the cloud below at the 770 level. So on the positive side, I think the waterfall might be coming to and end.

Does it mean we rally? Not quite. Interestingly enough, gold leads the CRB so if gold falls 25%, raw material prices will be falling probably just as aggressively.

Finally, from the economics side, the prices model is moderating now from its ultra high levels of a few months ago. Continued moderation is not supportive for gold to shoot higher. Easy monetary policy, which we currently have, is supportive. Generally easy money with rising prices argues for higher commodities. I am not saying that gold can't move up. I am saying though that the pricing pressures of yesterday are now unwinding and it appears that overnight policy, looking forward now, is tightening. This is not supportive for assets - or gold. Oh, did I mention that the dollar is in breakout mode? All of a sudden the prices of our assets becomes a bit more expensive for the global consumer to buy = less demand for commodities and thus more deflationary pressure.

So the bottom line is simple. There are bullish factors supporting at least stabilization in the gold price. The yellow metal is oversold and as long as 850 holds, I could see the bulls mounting a stand of some sort. Longer term though, things do not look so promising and if today's trends continue into tomorrow, gold could be on its way back towards the 600 level or even lower, depending on how far this dollar rally exerts itself (my projection of 82.50 should put gold around 600 if historical trends hold).

Disclosure: No holdings of the commodities mentioned though that can change as I trade the Euro, gold and dollar index from time to time.

Comments

[John Pseudonym:]

The chart has looked bad for a while. Plus, everywhere I turned I was hit with "Gold on it's way to $2000 an ounce" which cemented my belief that gold was on it's way to $200 an ounce.

2008 Aug 10 09:59 AM

[ussmls7:]

Do you really think King Hank cares about the dollar,he works for the Cartel , & they have tons of Gold! Why? They know what is coming,for all Nations that have sold all of the peoples Gold ! If Gold goes to to 100 a oz, it will buy more than 100 dollars !

2008 Aug 10 11:23 AM

[pitaking:]

Every casual investor who has a small gain from the gld will be running for the hills over the next few weeks as every talking head on CNBC or Bloomberg will be touting the rally of the dollar and the fall of gold and commodities. Gold had a nice run but the short and long term direction is down. I'm long the DZZ(double short) and EEV(double short EM) as the way to play this and I added to these positions on Friday.

2008 Aug 10 04:45 PM

[User 241510:]

yeah, these guys said the same thing (negative) few months ago when gold dropped into the 850s from the 1000s. Not a resonable explanation. August-sep , utmost Oct is a slow or sidways trend for gold historically. So if it doesn't break the 850 support , it will stay to hit above 1200 if the economy doesn't see any good progress.

2008 Aug 10 05:51 PM

[DavyJ:]

You said: "I know that index funds have been unloading these positions, which explains why we have not bounced."

Index funds?

2008 Aug 10 07:14 PM

[mark mchugh:]

Timothy,

Very good analysis. No one long any investment, likes to think about it going down, but you ignore the signs of the market at your own peril. Gold bugs should understand this as well as tech investors.

I'm glad to see a largely uninterested party write about price action, because both gold bugs and anti-gold bugs get too emotionally involved. I am a long-term gold bull, but that doesn't mean every day is "buy, buy, buy" day.

2008 Aug 10 09:46 PM

[E.D. Hart:]

You can pick virtually any price for gold, and then find a chart to support your reasoning. Bottom line: we are all guessing.

I have my own guess, that is based on a chart that links the value of the DOW to the price of gold.

Long term this chart says that gold is going to $4000, and the DOW is headed to a fair value of 8000. Not a prediction, just a reading of the chart.

2008 Aug 10 10:44 PM

[BrunoT:]

Silly boys and their silly charts. You might as well read tarot cards or do a star chart to see what will happen.

If your charts tell you the future, how come you're writing at this website instead of featured on FoxBusiness or other news shows nightly on TV?

2008 Aug 10 11:37 PM

[Tom Szabo:]

"I am saying though that the pricing pressures of yesterday are now unwinding and it appears that overnight policy, looking forward now, is tightening." - Timothy Charles

If "pricing pressures" are unwinding then why would the Fed risk undermining an incipient (supposed) recovery by tightening? Even if "pricing pressures" were not unwinding--which if true might only be a very temporary phenomenon--the Fed and other central banks are only bluffing when they say tightening can relieve them.

These "pricing pressures" as you call them are actually very deeply entrenched in the financial system, which was done by design. You see, the Fed and its global friends figured out quite a while ago that deflation must be avoided at all costs and one sure way of doing that is to encourage the creation of a gigantic, liberated capital base that can ebb and flow between markets, creating temporary hot spots (asset bubbles, as it were). You might refer back a few years to all the talk of deflation, which is actually much less frequent in the media these days despite the risks being ostensibly much, much greater. The reason: there was real basis for worry then because monetary policy in this area was untested, but that's no longer the case. Even though the Fed created this monster, it cannot now vote it out of existence. Bernanke&Co. admitted as much by discontinuing their reporting of M3.

Wanna talk demand destruction? Well, we are already having supply destruction in some commodities, namely the base metals such as nickel, zinc, and lead as well as uranium. In other words, mining projects are being mothballed due to current "low" prices. Here you already see "pricing pressures" working in reverse. I wonder how quickly we start seeing the same phenomenon in the energy markets if we are fortunate enough to get sub-$100 oil prices.

2008 Aug 11 02:15 AM

[Rene Cohrt:]

I am a common man taught by a wise mother, so I keep to gold and silver.

To the prices I bought 40 years ago and now in retirement I do´nt need to change dispositions.

I only had 5 financial transactions in my life and I sit on a pile of gold and silver

2008 Aug 11 05:55 AM

[Rhett:]

The price of gold is inversely tied to the dollar which, with current Fed policies, can only go down in value, i.e., inflate. Thus gold will go up for both psychological and fundamental reasons until the Fed increases interest rates to moderate inflation.

2008 Aug 11 09:05 AM

[Did U Think...:]

What is more likely to "go down" over the next 10 years:
a) gold which has been money in hundreds of countries for 1000s of years.

b) the USD whic is teetering on being thrown out of its world reserve currency status due to already huge and constantly growing debt with no way out of the death spiral in sight.

What do you think will happen to gold when the USA loses AAA status of its debt? We are now in no mans land, never before traversed, with respect to the USD. Given that land prices have bubbled to the sky in the USA and other western nations, it's getting harder and harder to find a good place to invest wealth there.

I guess many people will just hold their wealth in the USD as it evaporates before their very eyes. Good luck with that plan.

2008 Aug 11 11:11 AM

[secmaven:]

It is now clear that the monetary powers of the world can manipulate the value of any currency, commodity or stocks as a group at will. Therefore, knowing where the price of gold will be tomorrow requires us to be experts in mind reading. Only when the monetary powers of the world lose their now unified front will gold rise again. Depending upon the "buying season" for Indian weddings to save the day is a pretty weak reason to believe gold will go up in the near future.

2008 Aug 11 12:10 PM

[Wake Up Don...:]

How can the dollar be in a spike? This is fake trend. The economy is not getting better it is getting worse. This drop in gold and silver is from people being wrongfully influenced by people that dont know what they are talking about. Just wait until we get a new president and the interest rate gets to 10-12%. We will then see $1200-$1500 gold and $40-$50 silver. Now is the time to buy as much gold and silver that you can afford and hold on for the ride. You'll see!!!

2008 Aug 11 10:35 PM

[Francis Sch...:]

Technicals are very important. However, used without fundamentals, they are worthless. Ever since the Gold started its secular bull market trend, fundamentals kept changing in one and the same direction. Even with Gold down from $ 1,040 to $ 820, they haven't changed! Reactions and corrections come and go and though it makes one feel better if they can be followed using TA, this ain't always possible. Having said this, many TA make the error of looking at short term charts only. Gold, silver and other commodities look completely different on long term charts. They clearly show the cycle has still a long way to go (up). A long term chart for the Dollar index, for example, clearly shows the secular bear trend for the dollar is alive and well!

2008 Aug 12 05:07 PM

[AlwaysGold:]

On the contratry, investors will invest in bonds at higher interest rates if fed hikes rate to crub short term inflation. I believe Gold is going down.


On Aug 11 10:35 PM Mikecat wrote:

> How can the dollar be in a spike? This is fake trend. The economy
> is not getting better it is getting worse. This drop in gold and
> silver is from people being wrongfully influenced by people that
> dont know what they are talking about. Just wait until we get a new
> president and the interest rate gets to 10-12%. We will then see
> $1200-$1500 gold and $40-$50 silver. Now is the time to buy as much
> gold and silver that you can afford and hold on for the ride. You'll
> see!!!

2008 Aug 12 07:26 PM

[AlwaysGold:]

I completely agree with your comments but fundamentally speaking what is the correct level ?

2008 Aug 13 11:03 AM