Gold’s technical set-up is very interesting.
The metal, given its technical posture, is likely in front of an imminently big move either higher or lower (that’s not much help, eh?).
What follows hopefully clarifies how to know when the metal’s next big move has begun, what the direction of that move is and when and where that move might exhaust itself.
The most important questions we need to ask before we begin are as follows:
- Do you believe the rally in Gold since its 2001 low can be described as a “bubble” move?
- Was the September 2011 high print of $1,923 “the” high for the metal’s secular bull move that began in 2001?
If your answer to #1 is yes, let’s look at the “bubble” analog chart below. This chart plots the sell-off from respective peak prices in all of modern history’s recent asset bubbles.
Peak prices are indexed to 100%, which is each asset’s highest weekly close as part of its parabolic blow-off top move.
The move off gold’s 2011 highs is the bright red line. The move off the metal’s 1980 highs is the dark yellow (gold-colored) line.
Gold’s weekly closing high of $1,877 in September 2011 was 46 weeks ago. Gold is down only 14% from that high.
This represents the weakest sell-off (most strength) from a “bubble” high in modern history at this juncture of an asset’s post-peak move.
Now let’s assume your answer to question #2 was also “yes”. If so, not only do you believe gold was a bubble, but that its highs are already in as well.
As such, let’s fast forward a mere 10 weeks from now, to week 56 after gold’s “bubble” peak price last year.
Of all the “bubbles” analyzed in the chart above, no single asset has traded at more than 61% of its peak weekly closing price, 56 weeks after that peak has occurred.
Both gold and the Nikkei stood at 61% of their peak 1980 and 1989 tops, respectively, 56 weeks after the fact.
The minimum value at week +56 for all the “bubbles” analyzed above was 30%, which was registered by the Shanghai off its 2007 highs.
In other words, based on history, within 10 weeks we would expect gold, if it was a bubble and its highs are already in, to trade within the band of ~$550-$1,125, which would be ~30%-61% of its peak weekly closing price of $1,877.
Are there technical justifications for a move into the low $1,100s should gold break down? Yes.
Gold currently sits atop 23.6% Fib support in the chart below and is contained in a large flag pattern. Should it break down from this pattern, there are major support zones formed by lines (1) and (2) in the low $1,100s as well as 50% Fib retracement support at ~$1,090.
If we get a technical break-down and are short, it is within this region where we would look to harvest such short positions.
What happens if gold breaks out of the flag pattern it’s in and 23.6% Fib retracement support holds?
Well, it likely targets $3,000 in short order.
This is the 423.6% Fib extension level and where trend-line resistance (1) comes into play, which has been the line that has held gold’s various moves higher in check since its secular bull began in 2001.
If we get a technical break-out and are long, it is within this region where we would look to harvest such long positions.
Do Fib extension and retracement levels matter and/or work?
Is it a coincidence that gold peaked at $1,900 in 2011 at its 261.8% extension level?
Regardless, the set-up here is great…
Either gold was a bubble and its highs are in, in which case it is likely to fall hard and fast to catch up with the paths other bubbles have taken at this juncture (much lower prices in the near-term)…
Or it is a bubble, but has yet to experience its true parabolic blow-off top, in which case, much higher prices are likely in store.