Welcome to KitcoCasey. We’re pleased to be part of this great new site and we’ll be contributing regularly. In this, our first article we’re going to focus on gold since it’s now at an important turning point.
Gold has been declining for nearly three months, which has discouraged some gold investors. But putting this weakness into perspective, you’ll see it hasn’t been a big deal. For now, we’re going to focus on gold’s technical price action because this strips away the emotions, reasons and what ifs. In other words, this shows what’s truly happening. So let’s stand back and look at gold’s big picture first.
The Big Picture is Bullish
Gold has been rising for four years now; it’s bullish and the major trend is up, despite short-term ups and downs (see Chart 1). This bull market will continue as long as gold stays above its 65-week moving average, which is the major trend identifier, now at $410.
Gold has also been moving in what we call big picture steps. These are shown as 1 through 4 on the chart and they determine the strength, or lack of strength in a big move. The #1 rises are the best bull market rises and the #4 declines are the worst bear market declines. And here’s where we currently stand…
The steps were down for over 20 years from gold’s major peak in 1980, to 2001. But this changed in 2001 because gold didn’t fall to a new low when it formed its #4 low as it had before. This was the first change in over 20 years.
From there, the current #1 rise began and gold soared above its prior #3 peak in December 2002, again a first in over 20 years, and gold entered the second step of the bull market. The 1996 high then became the next target level, which gold reached last April.
Gold then hit another milestone last December when it broke above $430 as it entered the third step of the bull market, breaking above the 1996 #1 and 1990 #3 peaks, again a first in 25 years. This means gold has performed better than at any time since 1980.
It also means that if these movements continue, we could see gold near $500 and possibly higher by year end, which is the top side of the third step. Once $500 is surpassed, gold will completely break through the sideways action it’s been in since 1983 and the next step would then be the 1980 highs.
These are the big picture steps we’re currently watching and they’ll remain on track with gold above $410.
What’s Happening Now?
Zeroing in on the near-term action, we turn to gold’s leading indicator (see Chart 2B). Over the years, we’ve found this indicator has worked well in identifying the intermediate gold price moves. The As and Cs coincide with gold price rises and the Bs and Ds with gold declines. These are different than the big picture steps and they help us pinpoint good buying and selling areas within the bull market.
Last December, for instance, gold hit a 16 year high in what we call a C rise, which is the best rise in the A through D pattern. Since then, gold’s been declining in a D decline. These tend to be the worst intermediate declines in the pattern and gold usually falls to its 65-week moving average during this time (see Chart 2A). That’s exactly what happened this month, and based on timing the decline was due to soon end.
Most important, the leading indicator has now dropped to an extreme low. It’s at levels that have coincided with previous D decline lows and you can see that these levels have preceded strong intermediate rises in the gold price.
Since last week, gold has been rising. That’s been reinforced by silver and gold shares, which are also moving higher. So if gold now stays above $421, the D decline will be over. This tells us now is the best time to buy new gold positions looking out to the months ahead. Longer-term investors wanting to take advantage of a good buying point for long-term holdings should also buy now.
Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, gold shares and the other major markets. For more information, go to www.adenforecast.com