Personal note: I have been invited to speak at the Mines and Money London Conference on December the 2nd 2014. My presentation is called "What is the influence of ETFs on gold and silver?" If you would like to join you can receive 25% off your delegate pass by using my discount code: ML875SPK.

Update 19th of october 2014

Review:

In my last analysis from 7th of September I though that Gold would hold up well above the US1,240.20 level. Obviously I was wrong as Gold had a terrible month and plunged all the way down to US$1,183.30. If you followed my recommended stop swing traders should be at the sidelines at the moment.

Arguments for lower prices:

• 3-years downtrend: Overall Gold still is in a downtrend. US$1,525.00 remains the line in the sand. Gold will need much more time to break through this heavy resistance. Only a move above US$1,350.00, US$1,390.00 and especially US$1,430.00 will indicate that the mid- and longer-term trend indeed has changed. A sustainable move above US$1,280.00 would already brighten up the technical picture. The 8 year cycle for Gold should bring a significant low around 2015/2016. It could mean that this bear market has to continue for one or two more years. But we are very likely in the last quarter.
• Gold Monthly Chart: The long term up-trendline now is clearly broken. We may currently just see a retest of it. MACD sell signal active since November 2011 (this is extremely powerful and needs to change before one can really call the bottom). The MACD indicator has recently been moving away from a buy signal. On the 20-year chart you can see how low the MACD has fallen during the last 3 years and how huge the upside potential will be after the ongoing bear market is done.
• Gold Weekly Chart: In early September Gold broke through the triangle support around US$1,275.00. Consequently it continued to fall all the way down to the next important support around US$1,180.00. With the series of lower highs still in place the sideways movement sine June 2013 has to be classified as a descending triangle - which is utterly bearish. The support around US$1,180.00 will not hold for a fourth time, so already any move below US$1,200.00 should trigger another sell off in Gold. The target for such a move (probably the "grand final" of the bear market since 2011) can be calculated in various ways:
• a) The height of the triangle (US$1,434.00-US$1,179.40 = ca. US$255.00) which gives a target of US$925.00.
• b) In 2008 the correction brought Gold back to its former breakout level at US$680.00. Accordingly the last breakout level (back in 2009!) was US$980.00 - US$1,000.00. Gold hit this resistance level three-times before finally breaking through to the upside. This is my favorite price target if Gold breaks below US$1,180.00.
• c) The 61.8% fibonacci retracement of the last bull-run from US$680.00 up to US$1,920.00 = US$1,154.00.
• d) Analogy to the 1970ies when Gold went from US$25.00 to US$195.00 only to correct down to US$105.00 between 1974 and 1976. Always funny to realize that so far the current Gold-bull since 2001 is basically the 1970ies bull-market times 10 which gives us US$1,050.00 as the final bottom.
• Gold Daily Chart: During the last 10 trading days Gold had a good bounce of more than US$65.00 from the lows at US$1,183.30. But slow stochastic is already overbought, as well MACD histogram is already quite high, yet Gold is still trading below its 50MA (US$1,251.71) and way below its 200MA (US$1,284.34).
• Gold/Silver Ratio: Currently at 71.71. The ratio has not confirmed the recent recovery instead new highs pointing towards deflation! Silver continues to lack and has already broken through its descending triangle. Since May 2011 Silver is leading the whole sector down. Interesting detail: In the bear-market in the 1970ies Silver bottomed about 7months before Gold! It looks like we could see this happening again.
• Gold Stocks: HUI index at 6-year low! Looks like another descending triangle to break to the downside. The sector continues to be in liquidation. Oversold and extremely cheap but the trend remains down.
• US-Dollar: One of the main catalysts behind the falling gold price has been the strong US-Dollar. Over the last two weeks the Dollar Index has suffered a minor setback but the uptrend is still very much intact. As long as this does not change the deflationary forces remain in place.
• Stock Market Crash: Inter-market warning signals had been flashing for months. Since mid of September finally stock-markets have been correcting sharply lower. Volume and volatility have exploded and stock prices have lost key support levels. The last two trading days stocks posted a strong oversold bounce but make no mistake here. We are very likely in for more weakness maybe even an overall trend change (e.g. Russell2000 seems to be topping out...). Gold and precious metals should suffer in the first stage of crashing broad markets. But I expect the central bankers and politicians to open up the gates again and flood the markets with even more money & liquidity. When this happens Gold will be the phoenix rising out of the fire. But we are not there yet!
• Volatility: The CBOE Gold Volatility Index pushed strongly higher in recent weeks. We have a buy signal for this index which is bearish for Gold itself as volatility increases when the underlying is falling. The chart for the CBOE Gold Volatility Index does not show any signs that the expected big move is already over.
• CRB-Index: Falling commodity prices are deflationary in nature. The CRB-Index is hanging at important support now after being dragged down mainly by falling oil prices and the rising US-Dollar. Any signs of a major bottom are still lacking.

Arguments for higher prices:

• Gold Monthly Chart: No bullish indication at the moment.
• Gold Weekly Chart: Potential triple bottom at US$1,180.00. Triple bottoms are very rare but Gold made a triple top around US$1,790.00 in 2012 as well... MACD and RSI not confirming recent low because both indicators are at much higher levels creating a positive divergence.
• Gold Daily Chart: Since the low at US$1,183.30 Gold has pushed sharply higher towards and above the upper Bollinger Band (US$1,245.28). We have a new MACD buy signal and RSI is moving straight higher while Stochastic is trying to embedded. This is bullish action and smells more like a trend change than just a "dead cat bounce".
• Gold-Stocks: The HUI Gold Bugs Index has been acting very weak but is extremely oversold and has posted a fresh MACD buy signal. The volatile price action during the last couple of trading days might be a bottom building and trend change indication. The index needs to hold above 183 points. According to www.goldstockanalyst.com Gold stocks are 42.4% undervalued and trade as if Gold was at US$695.00.
• Euro-Gold: Higher lows painting an ascending triangle! A break though the resistance at 1.000,00€ will be a strong buy signal. The €-Gold Chart stands in a clear contrast to the US-Dollar Gold chart... In the past €-Gold has often been the first to move and Gold in US-Dollar followed later...
• Sentiment: While short-term sentiment has recovered due to Gold's US$65.00 bounce, the mid- and longer-term numbers are still at excessive pessimism levels.
• Seasonality: October tends to be a bad month for Gold, but seasonality has been upside down most of the year. So a strong october would not be a surprise either. Generally seasonality is now friendly until spring 2015.
• CoT-Data: According to the latest CoT-Data the commercials had a 78,823 net short position in COMEX Gold Futures last Tuesday. This is a pretty low short-position which signals clearly a lack of hedging. At the same time the small speculators (usually the ones who get slaughtered) even increased their short position into Gold's recovery last week while the large speculators (hedge funds) starting to build up their long position. On top short interest in Gold recently exceeded 20% of total open interest which is an extreme and therefore bullish. All in all the CoT-Data clearly points to a strong move higher.

Conclusion:

• The big and decisive question is whether Gold is just bouncing off the support at US$1,180.00 for the third time before finally breaking through this level (similar to spring 2013 and the former support at US$1,525.00) or whether this is indeed a potential triple bottom for Gold which should be followed by at least a US$150.00 - US$200.00 rally.
• Inter-market actions as well as Silver's weak performance point to a coming breakdown in Gold that could push prices down to around US$980.00 - US$1,050.00. This should be the final sell off and the end of this multiyear correction. But so far there is no immediate confirmation for this scenario.
• Short-term I think there is a good chance that first Gold will recover up to around US$1,275.00-US$1,285.00 in the next couple of days or weeks. Swing traders may short-sell Gold in this area with a stop loss at US$1,320.00 and a price target below US$1,100.00.
• Investors with a long-term perspective should have bought more physical Gold below US$1,240.20 in recent weeks. Continue to accumulate below US1,240.00 but keep some power dry in case Gold indeed is correcting further down to US$1,050.00. You should buy because physical Gold is an insurance and will never get to zero. Nobody knows the future and nobody can always time the market exactly. But the whole financial system has become very unstable. You're just moving paper cash into a very safe conservative and liquid asset class that will protect you and your family. I recommend to put 10-20% of your net-worth into physical Gold and Silver.
• Also remember and understand that the current situation in the Gold-market is building the fundamental foundation for a spectacular bull market in the future. The whole sector is in liquidation, without financing, exploration is gone, development is cancelled, the left deposits are all sterilized due to high grade mining and all the weak hands are shaken out. Future supply is being destroyed now. But prices can fall lower than anyone can imagine. Short-term the market does not care about fundamentals like production costs but is always choosing the most painful way for the majority of market participants. The bigger the pain now the greater the gain later.
• The main driver in this bear market has been the (forced) liquidation of Gold ETFs. Although being at its lowest level since 2009 this trend has not yet reversed. There are still 761 tones of Gold in the SPDR Gold Shares (GLD). Mainly bought on margin by speculators like hedge funds. Most of them are out already but obviously there are still some (John Paulson) who are riding their GLD position down to now -35.4% in the last 3 years.

Long term:

• Nothing has changed
• Precious Metals secular bull market continues and is moving step by step closer to the final parabolic phase (could start within 1-2 years and last for 2-5 years or even longer)
• Price target DowJones/Gold Ratio ca. 1:1
• Price target Gold/Silver Ratio ca. 10:1 (for every ounce of gold there are 9 ounces of silver mined, historically the ratio was at 15:1 during the roman empire)
• My personal price target remains at US$5,000.00 to US$8,900.00 for Gold within the next 5-8 years
• Fundamentally, when the current bear market is over Gold should start the final 3rd phase of this long term bull market. 1st stage saw the miners closing their hedge books, the 2nd stage continuously presented us news about institutions and central banks buying or repatriating gold. The coming 3rd and finally parabolic stage will end in the distribution to small inexperienced new investors who will be subject to blind greed and frenzied panic.