Analysis of Gold Price consolidation January 2010
The current consolidation shows signs of weakness in dollar terms but not in Euros or pounds. The Euro is currently 11% stronger against the dollar and the British pound 16% stronger, so investors in those zones have seen that percentage increase over the gold price rises since the start of 2009 in real terms My technical indicators would be flashing warning lights if USD 1,091 were not to hold. Theoretically, we could fall back to the USD 1,000 – 1,030. In pounds terms, if £670 were not to hold, we could fall back to £620 – £640.
If USD 1,091 holds or if we have a false breakout, then the upward trend that started last autumn will probably continue until April / May 2010 and we can still expect to reach an objective of USD 1,400 – 1,500 (which is equivalent to about £900 per ounce, depending on exchange rates). If the consolidation continues downwards, this means that the last peak of USD 1,226 (£742) represents the end of the intermediate bull trend that started in September and indicates that we can expect an extended consolidation period before a new bull market develops. The maximum fall that we are likely to see will be 10% from the current level and will be due to panic selling from the £605 – £610 support zone, which also corresponds to the very long term moving average for this bull market (moving or rolling average = technical method of smoothing a graph showing an upward price trend to provide an average price that eliminates the highs and lows ).
As is always the case, the best strategy for a long-term investor is to buy the panic (when price is driven down by panic selling) and sell the excess optimism. Nevertheless, there are two important comments on this strategy. The last peak of USD 1,226 was not due to extreme optimism or, at least, nothing like what we saw during the previous peaks of May 2006 and March 2008.
It should also be noted that the difference in % terms between the price and its long-term moving average has remained quite small in comparison to the differences that were present in May 2006 and March 2008 and this shows that there is still a certain upward potential to complete the bull trend. Additionally, as the difference is much smaller than during previous bull trends, the likely fall from current levels is also much smaller. It’s this that makes me suggest that liquidating one’s investment to avoid a possible fall of 10% whilst possibly missing a 30% rise in few weeks or a month is not a good strategy at all.
It’s the very long term moving average (the 325 day moving average) that has always allowed me to identify the best purchasing opportunities in this bull market. Only the 2008 crash has broken this moving average during the last 7 years but we should not have our heads in the clouds as a new crash on the market would not involve the gold price this time in the same way as in 2008. Why? Because institutions and traders sold their assets in a panic sell off in gold due to deleveraging (mainly hedge funds and other institutionnals) and perhaps central bank manipulation. During that time, most people weren’t aware of the dangers and did not think we were on the verge of a collapse of the financial system. The resulting bank closures would leave them prisoners to a possible monetary revision with a massive devaluation of paper money, the cash, that everyone was accumulating. Most people were unaware as to how serious the situation was! If a new crisis were to occur, I believe that gold will not be sold in the same way because the institutions and central banks, alerted by the 2008 crisis, are now much more aware of the terrible risks related to their system. Obviously, if there were to be a new crash, traders looking at the short term, speculators looking for margin calls and other weak individuals will sell all their positions on gold and this may cause a temporary decline, at the start of the panic. This will then be followed by many professionals and bankers taking advantage of the situation to make MASSIVE purchases of gold metal.
The 2008 crisis was financial but the next will be monetary because the financial health of countries will be in doubt with the possible bankruptcy of several of them. I don’t have to tell you what the best thing to own in a monetary crisis is – Â gold . We could see massive selling of government bonds and people seeking refuge in anything tangible which retains its value. Under these circumstances, the leading beneficiary will be gold!
The weakness in the gold’s price that you have detected recently is due to credit conditions being tightened in China. China dominates the markets these days. World markets often undergo a strong correction in the two to three months following a change in its monetary policy. Traders are anticipating this at present and have sold their assets in raw materials and emerging markets, which is the reason for the weak gold market. If the correction on the stock markets is only 20 – 30 % then this is not the start of the next crisis but only a market correction. In practice, all the money that was used to support the economy in 2008 will eventually end up in the economic circuit and this is why stock markets have continued to be bullish despite poor economic indicators.
Inflation will inevitably reappear sooner or later. The next crisis too, but it could occur later than the pessimist are suggesting because the re-launch plans and monetary injections are still supporting the markets. We are currently in the eye of the storm. We can expect to see the price of some agricultural products increasing during the following months, for fundamental reasons, and this will have a negative effect on the lives of many people who have already been severely hit by the crisis. Violent demonstrations can be expected. Some people, who have lost everything, simply have nothing more to lose, as Gerald Celente said.
In short, my view is that we have two options for the gold market, the best and the worst, either gold returns to the bull trend that started in September and reaches an intermediate peak of USD 1,400 – 1,500 in April/May or gold will continue its correction as a zigzag until June with an average floor of about £630 then stay flat during the summer before rising again in the autumn with an objective that exceeds USD 1,500 as the first signs of inflation returning become visible or we see the first effects of the sovereign risks that will effect some countries at that time. One thing is certain, 2010 will not be boring on the financial markets!
based on an article by Léonard Sartoni up dated by Maurice Hall
June 10th, 2010 at 9:53 am
I am glad I investet some money in gold a few years back, but right now I am thinking of buying silver rather than gold. I think the gold price won’t be rising as fast in the future, although it is still the better option than buy some loussy shares.
August 4th, 2010 at 2:16 am
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