Based on the December 14th, 2011 Premium Update. Visit our archives for more gold & silver analysis.
Whatever glow there might have been from last week's European summit turned to gloom as markets turned downwards Monday. Global investors drove down everything in sight, including gold which dropped nearly 3% to a seven-week low to trade under $1,660 an ounce. Gold got lumped with other assets considered risky (we live in interesting times, as gold was known to be the "safe asset" for millennia and now it's a "risky asset"). European indexes were down: Germany 3.4%, France 2.6% and Italy 3.8 %.
Everyone seemed worried that the steps taken by the EU last week fell short of what is required to stabilize Europe's sinking bond markets. Stop-gap measures such as the coordinated international injection of liquidity only buy time. Can they buy a lot of it? Likely a few more years. Is the situation "taken care of" in the short term? Yes. What's making the price move lower in the short term? Emotions. And in this case? Worries.
At the bottom of all this anxiety is fear of an imminent demise of the eurozone and extreme fear is something that we see around bottoms, before a rally starts. Whether the fear is currently extreme is a different matter.
Tuesday, U.S. stock futures edged temporarily higher after encouraging economic-sentiment data from Germany and ahead of the U.S. Federal Reserve's announcement on monetary policy.
In a knee-jerk reaction, as is the case in previous downturns in the price of precious metals, the anti-gold faction had a field day this week. Mark Gongloff in The Wall Street Journal wrote rather sarcastically:
Time to check back in on how precious metals are working as safe havens: Yep, still not working. Gold and silver getting absolutely pounded today, doing much worse than the stock market, providing not one quantum of solace for anybody who'd bought them assuming they'd hold value amid a global credit apocalypse.
Although it is true that we did not get much "solace" from Monday's market action, we beg to differ on Gongloff's assessment of gold as a safe haven. He himself said in his article "the global credit apocalypse still has some time to play out."
Having said that, let's see how the situation might play out for precious metals in the short-term. Let's begin this week's technical part with the analysis of gold itself (charts courtesy by http://stockcharts.com.)
This week, we begin with a look at the very long-term chart (if you're reading this essay at www.sunshineprofits.com, you may click on the above chart to enlarge it). With the breakdown being in place, we now must consider downside target levels. If the current decline stops fairly soon, the likely target level is around $1,550, which is a bit more than 5% below Tuesday's closing price. A continuation of the decline could bring prices down to $1,400, which seems to be a long-shot but is still a valid maximum downside target level at this time based on technical analysis of this chart.
The bearish trading pattern was not expected, since triangle patterns normally are followed by a trend in the same direction as the one which preceded it. This is not what happened this time, however, although the recent breakdown could still be invalidated. However, with prices having declined significantly on corresponding high volume, the bearish scenario is more likely, and an invalidation of the breakdown does not seem very probable on Wednesday.
In the past, post-bottom rallies (bottoms are marked with red ellipses on the above chart) frequently resulted in prices rising at least to the 61.8% Fibonacci retracement level (and gold has in fact moved to this level). In many cases the rally took gold even higher - to previous highs or even higher. Consequently, that was the expectation as we looked ahead last week. Instead, we have seen a breakdown from the triangle pattern and the move to the upside is no longer a likely outcome.
In the past, when price levels did not pursue the level of the previous high, declines generally stopped close to the level of the original bottom and then rallied. This would coincide with our $1,550 target level from the bottom seen earlier this year, so there is a good chance that gold will rally if the decline takes it down this far.
Two exceptions to this rule have been seen in recent years. One was in 2008 (gold moved significantly below its first low), which does not seem likely to repeat as overall market conditions are much different today. The general stock market also plunged at that time, and there is no sign of this on the horizon this time around. In 2004, gold's price went slightly below the level of the previous low and this is why we have a not-too-likely worst case scenario of $1,400 on the downside. Although the outlook based on this chart alone is bearish today, the next rally could still bring gold as high as $1,900 or even to the$2,200 price range.
In the short-term GLD ETF chart, we see that a short-term support level has been reached. Also, an ABC correction is seen which may be an indication that we have seen the final part of this move down. Based on the breakdown below the rising support line, the situation is not as bullish as it was a few days ago but this chart is not as bearish as the long-term gold chart presented earlier.
Please note that the recent move lower took place on significant volume which is a bearish confirmation.
Summing up, the overall analysis of the gold charts this week shows a more bearish bias than it was the case just a few days ago. The situation for gold can best be described as mixed at this time, with more declines being possible. We will leave details i.a. regarding probabilities of up- and down-moves to our subscribers.
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Thank you for reading. Have a great and profitable week!