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Putting Gold’s Recent Weakness In Perspective at Trader’s Narrative





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I don’t want to harp on gold too much but since we discussed the various gold sentiment measures recently and the Rydex traders rushing out at the shallow correction, I wanted to also provide a long term perspective.

Back when taxi drivers were becoming daytraders and when any public corporation could depend on a pop in their stock price just by adding “.com” to the end of their name, gold was being shunned by the general public. The double bottom which launched the secular bull market was formed when gold fell to a low of ~$250 in 1999 and again in 2001. In the ensuing decade it rose almost five fold:

gold futures correction Feb 2010 long term perspective

The long term trend line (green) goes back to 2001 but it accelerated (the slope steepened) in 2005 (blue line). This also coincides with the start of the parabolic spikes in price of gold.

Most importantly, this long term chart puts into perspective how shallow the retracement has been so far this year. But nevertheless, it has caused the “dumb money” to flee for the hills. That is bullish in the short term. But if gold were to turn up here and just ramp higher we would be right back in a parabolic situation just like we’ve seen 3 times already.

A correction to $900 - crashing through the psychological $1000 level - would still allow gold to remain at the accelerated trend line from 2005. And a super-bearish decline all the way to $760 would only take us back to the very long term trend line which goes back to the beginning of this bull market.

Can you imagine how demoralized the “gold bugs” would be if gold does indeed fall 18-30% more from here? The last two times that gold went parabolic it was followed by a 20% correction (2006) and a 30% correction (2008). So a decline of that magnitude is neither uncharacteristic nor devastating.

In fact, a lasting trend needs to be moderate in tone. If gold corrects to the $1000 level and then bounces off it strongly as it did in 2008 off the $700 level, it will only set up a third accelerated trend line. While the bulls may cheer such a move, it will put the secular gold bull market in jeopardy. In such a scenario, the long term picture will itself become parabolic - rather than just containing small bouts of parabolic activity.

So to sum up, my crystal ball is telling me: short term gold is higher, medium term, lower. And long term, still a secular bull market. But then again, maybe I’m reading it wrong :)

For another perspective, check out this video by Adam Hewison: Is Gold Poised to Go Higher or Lower?

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6 Responses to “Putting Gold’s Recent Weakness In Perspective”  

  1. 1 MachineGhost

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    Gold collapsed 50% in the mid to late 70’s that took about two years to recover. That would be devestating but it will clean the slate of all the weak hands for the mother of all rallies later in the decade.

  2. 2 Babak

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    a 50% drop you say? that would put a fork in this secular bull market and fatally break the uptrend line, especially if it happens in one cascading move

  3. 3 Mike C

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    FWIW,

    “The Adens’ current take on gold: They say that what they call the “C Wave” — which carried it above $1,200 — is over, and a “D Wave” correction has begun. But that’s not bad.

    They write: “Gold’s bull market is solid, a new phase has begun, and it’s currently declining in a sharp, yet normal downward correction. … The $1,000 level is a key support area, which is near the prior C peak in 2008. The 65-week moving average, is now at $975 is rising and it’s set to reach the $1,000 level in a few months, which will further reinforce the support at $1,000. For now, $975 to $1,000 is the strong support level for gold.”

    The Adens guess that the gold decline is about half over, most likely ending in April.”

    Obviously, there is no single one right way to read a chart, but I’ll stick to my assertion that we really would need to see $1000 hold to be confident the secular bull is still in effect. I suppose it could correct to those 2 trendlines and still be in its secular bull, but I don’t see the point of sticking around and holding from 1000 to those levels to see what happened. Seems to me the wiser course would be an immediate exit on a weekly or monthly break of 1000 and then just watch and wait and see where it stabilizes.

    At this point, I’m more interested in how to possibly gauge the magnitude of the next upleg if and when it starts. This upleg didn’t mirror the 05-06 or 07-08 upleg either in magnitude or duration so perhaps it is best to throw that out the window and use the sentiment numbers in terms of a bullish extreme to time your exit rather then a specific percentage increase or ending date like the spring.

  4. 4 Babak

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    Mike, thanks for that (btw I linked to that article yesterday at news.tradersnarrative.com. (You can also find lots of other interesting links and news there.) The $1000 level is the first real pullback level for a meaningful correction but my point was that even if gold loses that very visible support, technically it is still very much in an uptrend. Of course, that is not much solace for those that are holding all the way down.

  5. 5 MachineGhost

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    There were extenuating circumstances. After President Nixon delinked the dollar from gold and it shot up, the IMF and central banks starting selling off their gold reserves which burned those pioneers smart enough to profit from the delinking. So maybe 30% is more reasonable nowadays. But it could probably get to 50% again, like if those bankrupt EU countries had any gold to sell.

    Annualized CPI inflation is forecasted to decline and bottom around June 2010. However, the angle of decrease is relatively minor compared to last year, certainly more of a disinflation than a deflation. So Gold could hold $1K. I guess it will depend alot on how damaging the EU fracas and second wave of mortgage foreclosues is.

  6. 6 Kirk

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    The gold might be weak for some while as the economy shows signs of recovery. The underperformance of the equity in 70s and early 80s were followed by strong outperformance by the asset class, the latter can be attributed to ‘giant field’ discoveries in 80s (these discoveries contained the inflation). Unless some giant fields are discovered gold and crude will remain strong.

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