This post is going to upset some gold bulls. A compelling case can be made that the December low, rather than constituting a successful test of the June low in order to establish a base from which to resume the gold bull, merely represents the second tag of a large, descending triangle. If true, the new year rally may be topping and, in fact, the high price for gold for 2014 may have already been seen.
Let's begin with gold's potential triangle formation:
So why do I suspect a triangle? Well, observe the shaded area above. This time period represents a left-translated (LT) weekly cycle that did not fail. A LT cycle is one that peaks left of center, time-wise. In other words, a cycle that rallies fewer weeks into its peak than it spends falling into its trough.
Naturally, with more time to descend than rally, LT cycles tend to fail, which is to say they drop below the previous cycle low. Since the December low held above the June low, the Jun-Dec weekly cycle did not fail, despite being LT.
An important point is derived from this cycle lesson: most instances in which a LT cycle does not fail involve triangle formations. In fact, the existence of a LT cycle that does not fail often helps me anticipate triangles long before the formation takes a visible representation on a chart. A third test of the $1200 pivot would not only shock gold bulls, but deliver confirmation of a triangle scenario which projects price down to $1,000.
Before dismissing this possibility as far-fetched, a trader should also consider the fact that the commodity complex in general is due for a 3-year cycle low in the first half of 2015. And while gold, under certain circumstances, could buck the trend and rally on its own, I would not bet the ranch on that outcome.
Furthermore, a 2013 low for gold would deliver a multi-year cycle low at the 5-year mark for the yellow metal. Gold's multi-year cycles tend to run 7-9 years, so a 2015 low makes much more sense. Finally, silver's recent, negative divergence relative to gold produces a warning signal that the PM market may be peaking. Silver typically outperforms its fellow metal in the latter stages of a weekly cycle.
A bearish outcome is not set in stone, but several ominous factors are obviously present from the standpoint of cycle analysis. As noted in the Member Letter, I recently exited PM positions to await a more solid setup.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.