Three Steps Forward and Two Steps Back: The Gold Forecast, Running of the Bulls (Part 5)

Friday March 23, 2012 15:40

Trading gold is not a sport for the timid; it calls for precise insight, nerves of steel and one’s fortitude to be composed of brass. From 1520 per ounce, gold prices climbed to 1789 (chart 1 below), in a single rally starting at the end of December 2011and lasting until the end of February (intermediate wave 1).  

Chart 1: First rally of 2012

Three steps forward and two steps back:

The correction that followed would begin with a $100 dollar single day drop in price (chart 2, red triangle), and as of this morning’s trading, gold has hit an intraday low so far of 1628. Gold prices have given back almost 61% of their recent gains (chart 2).

Chart 2: First correction of 2012

The chart above also contains a Fibonacci time extension. This extension begins at 1520 in the beginning of December of 2012 and ends at the conclusion of the rally at the end of February. The time extension from these two data points equals 100%. The first projection of time based upon the sequence is at 138%. This aligns with gold’s current market activity in terms of its time sequence and lends some support to the possibility of a bottom in this area. Another indication is the 61% retracement. A 61% retracement takes gold to 1623. Today's intraday low was a few dollars from that point at 1628.

Chart 3 below is a 420 minute candlestick chart of spot gold. The current candle forming in this chart can be currently identified as a hammer. According to Wikipedia: A hammer is a type of bullish reversal candlestick pattern, made up of just one candle, found in price charts of financial assets. The candle looks like a hammer, as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be a valid hammer most traders say the lower wick must be two times greater than the size of the body portion of the candle, and the body of the candle must be at the upper end of the trading range.

When you see the hammer form in a downtrend this is a sign of a potential reversal in the market as the long lower wick represents a period of trading where the sellers were initially in control but the buyers were able to reverse that control and drive prices back up to close to the high for the day; thus the short body at the top of the candle.

Chart 3 potential price bottom?

The water continues to rise

Annual returns in gold investments have had stellar returns for the last 11 years, and It is this author's belief that this run is far from over. Much of gold's recent pricing factored in ongoing issues in the European Union and Greece’s debt crisis. Unlike the United States’ Federal Reserve System, the European Union has never had the mechanisms in place to funnel capital to their debt ridden member nations. The mechanisms they created alleviated panic as they bailed out Greece, allowing that country to not default on a credit payment. As such much credit must be given to the European central banks and its leadership as they securely put into place a bailout package, which for the time being has securely placed a finger in the dike.

Italy, Ireland and Portugal, according to some reports, face a debt crisis similar to Greece’s. Will the E.U. be able to provide bailout packages and infusions of massive amounts of liquidity as these countries face potential defaults on their current loans?

Can sovereign nations like Greece, Italy, Ireland and Portugal increase their GDP to match their unsustainable spending? If not, will they be able to restructure their budget to align spending with their annual GDP? And the larger question remains if not, can the E.U. properly enforce a sustainable budget policy tied to annual GDP’s? As great of an accomplishment as the recent E.U. bailout is, we are far from seeing an absolute resolution of the fundamental problems at play. Now that gold has factored in a more stable European Union, what will happen if sovereign nations begin to require huge monetary bailouts?

Up until the financial crisis of 2008, central banks were net sellers of their gold bullion. At the beginning of 2009 central banks worldwide have reversed the trend and quietly and slowly begun to accumulate gold bullion. In 2010 central banks purchased over 367 tons of bullion. And last year accumulation by central banks to increase their gold bullion inventory reached a number not seen since 1971, as they purchased about 430 tons of gold bullion.

The fact of the matter is that in the absence of a gold standard, and without prudent monetary policies, which are balanced to GDP, the opportunity for investors to continue to lose faith in paper currencies will continue. So where are gold prices headed? Simply put: three steps forward and two steps back.

Gary Wagner

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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