"God has placed no limits to the exercise of the intellect he has given us, on this side of the grave." ~ Francis Bacon 1561-1626, British Philosopher, Essayist, Statesman
We have avoided purchasing gold stocks and additional Gold Bullion for quite sometime and we are glad we have done so because even though Gold spiked over $720 last year most gold stocks did not put in new highs. In fact we have avoided Gold stocks now for over 2 years and focussed on other parts of the commodities markets which have performed very well indeed. In fact our foray into Palladium proved to be a great play; bullion closed up a 100% higher from our entry points and we had several 100% plus winners in a row in the Uranium sector. For the prior 12 months ending in June of 2006, Palladium was the top performing precious metal.
The above is a 3 year chart and it quite clearly illustrates that Gold has been putting in lower highs which is a short to intermediate term bearish development. For almost 12 months gold has done absolutely nothing and has driven many investors and especially the Gold bugs insane.
Every time we published an article on Gold that was slightly negative, Gold bugs lost their mind and started to attack us. In fact many of them predicted that Gold was ready to hit 900 and 1000 in just a few months after it traded past 720 last year. Unfortunately for them this has not come true; one cannot will or tell a market what to do. At the latest Gold Show in Vancouver, Canada the attendance was rather low and when asked how many had purchased gold in the last 12 months only a few hands went up. This is a good contrarian development as it shows that the Gold bugs are going nuts and are now losing faith in this bull. Gold has been putting a nice channel formation and so when it eventually moves the move should be pretty decent. Note that we have a channel within a channel; if 630 is breached then we are going to test the bottom of the main channel formation which is in the 570-594 ranges. Gold has now violated its long term up trend line and this area that was once support has now become a zone of resistance. Let's zoom in a bit to get a clearer picture.
Let's start of by looking at the 2 year chart of Gold. We have several channel formations; all of them have developed inside the main one which has a range of 570-690. Today Gold closed down 9.40 to 645 and clearly violated the main up trend line. Thus it's almost a given that the 630 zone will be tested next which represents the bottom of the first channel formation. If this support level is breached the next support level is 600. Current action is indicating that Gold could very well spike down one more time just to drive many of the now frustrated Gold investors into selling and with some luck it could trade down all the way to 570 which would make for a splendid buying point. However if you don't have a position it would be risky to simply hold out for this level only. Anything between 630 and the current price is a fine place to start nibbling; if it happens to drop all the way to 570 then you can start to buy aggressively.
What is very interesting to note is that when Gold put its high back in May 2006 the dollar index was trading around the 83.20-84.00 ranges. However since then the Dollar has plunged so logically one would assume that Gold would rally to even higher highs however it has failed to do that. In fact in the face of a weaker dollar gold has actually broken down.
The one year chart clearly illustrates that Gold has been having a rather tough time breaking past the 700 barrier in the face of an even weaker dollar; thus as stated before there is a good chance that it could spike down one last time before embarking on rally that could last from 6-12 months.
There are still many positives
- The put call ratio on the XAU has spiked up significantly and is now at an extreme point which suggests a turn around is most likely not to far out.
- Gold has put in a nice wide channel formation for over a year and when it breaks out of this formation the move should be pretty big.
- A lot of gold investors/gold bugs are now feeling down and frustrated that Gold has not traded to new highs as they so boldly envisioned almost a year ago; from a mass psychology perspective this is a very bullish development.
Conclusion
Gold has breached its main up trend line in both the 1,2 and 3 year charts and thus there is a good chance that it could test the 630 price point level. If it fails to hold at this point (there is pretty strong support here) then the next support level becomes the 600 price point level; a very extreme move would take it down to the 570-585 ranges, a zone that provides extreme support. We would also view this as an incredible buying opportunity if it were to happen, though we would not hold our breadths as it's an extreme move. The put call ratio on the XAU is also close to an extreme point which suggests that a turn around is not to far off. Finally the Gold bugs are starting to get very agitated which means that a bottom is not to far off in the makings. Thus if gold is going to spike down it will have to do this relatively fast. If it is able to trade above 630 for 15 days in a row after testing this level it will mean that the chances of it trading below 600 will be less than 33%.
It would be a prudent time to start looking into gold stocks that are extremely oversold now.
"Intuition becomes increasingly valuable in the new information society precisely because there is so much data." ~ John Naisbitt American Trend Analyst, Futurist, Author
All Charts were provided courtesy of www.prophetfinance.com.
