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Coming Alive

Thursday March 21, 2013 09:42

With the stock market hitting record highs, gold has been taking a back seat. But that may not be the case for long… Gold is coming alive.

We are firm believers in going with the flow. The flow for gold is still up, but after a stellar 12 year bull market run, this market is telling us to have patience and to also continue taking advantage of weakness to accumulate at better prices.

Gold’s reluctance to fall is most interesting. After rising 660% since 2001, it has fallen less than 20% from the highs. That is, after reaching its record high 1½ years ago, it quickly fell to its low. That low was tested in the Summer of 2012, and it was tested again a couple of weeks ago as gold neared this low (see top Chart 1A).

This low is key today for both gold and silver and we’re watching these levels closely… $1536 and $26. If gold and silver can weather the storm by staying above these levels, they will come out smelling like a rose.

This is why central banks continue buying gold. They added 534.6 tons of gold to their reserves last year, the most since 1964. Plus, the World Gold Council also reported official holdings increased to more than $12 trillion in 2012 from $2 trillion in 2000.

India has been the largest buyer and its January gold imports jumped 23% from a year ago. China is launching its first ETF backed by gold, and its new Shanghai gold exchange has become a full on exchange. China’s been a major gold producer over the last four years and it’s also been importing more gold, so much that it’s surpassing India.


As we’ve often explained, gold tends to move in intermediate cycles and that’s been the case since the 1970s. This repeating A through D cyclical pattern is identified on the chart.

The As and Cs coincide with intermediate rises in the gold price and the Bs and Ds coincide with declines. For now, the gold price is in a B decline.

This B decline started last October and during these past five months gold lost 12+% from the $1796 high to the $1572 low. This decline has been longer, yet it’s been normal compared to prior B declines. The worst one was in 2009 when gold fell over 13%.

As you can see, gold’s leading indicator is currently at a low area (see Chart 1B). This strongly suggests that gold is oversold and it’s looking for a bottom. In other words, this chart is telling us that gold’s next direction is far more likely to be up, rather than down.

Chart 1A also shows gold clearly below its 23 month moving average for the second time in the 12 year bull market. The last time was during the 2008 financial crisis. But as long as gold stays above the prior D low at $1536, all is well.

On the upside, if $1536 holds and gold stays above $1590, it could jump up to the $1660 level, and the B decline would then most likely be over. Once $1660 is clearly surpassed, a new C rise will be underway and these tend to be the strongest intermediate upmoves.

Gold’s next stepping stone resistance levels before a record high could be reached are the $1750, $1800 and $1903 levels.  Gold would be flexing its muscles, however, above $1800, a level it’s failed to overcome since Sept 2011.

On the downside, however, if gold falls below $1536 we could see sharper down moves before the lows are seen. If this happens, we could possibly see the $1300-$1450 level tested, in a worst case scenario. But we don’t think that’s going to happen.

By Mary Anne & Pamela Aden
Courtesy of www.adenforecast.com
Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter named 2010 Letter of the Year by MarketWatch, which provides specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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