Gold Is Sick, But Hardly Dead

When the gold dust settles, the stage will be set for a renewed rally

   

Yep, it finally happened. The 1,057-day streak of gold prices remaining above the all-important 200-day moving average line was broken on Wednesday. That key line was at $1,618.50, and gold closed on the day at $1,577.33. It was the lowest close since July (though not the lowest low), and it tops off more than an 11% dip since the early-November peak.

Two words: Not good.

At least those are the two words a few former gold bugs would use to describe what’s going on right now with the world’s most precious of metals. Even more dire, however, are their predictions of where all this is going.

At the heart of the meltdown — this week’s part of the meltdown anyway — is Europe. The entire continent is still a fiscal mess, but that reality has only started to set in this week. And it’s doing so with a vengeance, forcing traders out of euros and (get this) into U.S. dollars. However, with no real fix for Europe on the horizon, it’s a trend that’s not expected to reverse anytime soon. In fact, with Fitch downgrading five major European banks on Wednesday, the entire euro zone and its debt are likely to become the equivalent to radioactive waste for investors — unwanted.

The $64,000 question is simply whether or not this really is the beginning of a new bear market for gold, or just a lot of the same-old knee-jerk (and short-lived) worry we always hear when things get a little nasty. This reporter suspects it’s the latter.

Yes, the 11% plunge since early November is horrifying. So is the 17% nosedive from September’s peak. Nobody was complaining when gold soared 26% in July and August though, reaching an unheralded overbought condition. Indeed, few even really noticed the magnitude of that move. They should have, though, because it was the massive size of that move that set up an equally massive correction now.

That’s the gentle way of saying what comes around goes around, and my subtle way of segueing into a pro-gold argument.

Gold is sick, but it isn’t dead. In fact, it could continue to slump to $1,530 area, and still not technically break a long-standing support line that extends all the way back to 2009. I’ll even go as far as say gold prices could tumble under that support line (orange) and still be in a broad uptrend. After all, a pendulum swings in both directions, and given how far the pendulum’s bullish swing took gold in August, we owe it at least a little more downside wiggle room than what it’s used so far.

But just how far could gold sink? Mr. Fibonacci says there’s a major 38.2% retracement line at $1,442.30. I don’t disagree. That would be a 24% decline from the peak. That would also roughly be the point everyone becomes fully convinced gold could never possibly go higher again … the perfect bullish/contrarian catalyst.

Brumely gold PNG Gold Is Sick, But Hardly Dead

[For those not familiar with Fibonacci numbers, they're worth a quick study using your favorite search engine. Interestingly, the idea works quite well when it comes to chart analysis.]

I know, I know … I’m ignoring the “fundamentals.” I’ve got news for you: Gold doesn’t trade on fundamentals. It should, but so should stocks, and they sure don’t reflect any logical, rational value right now. Nobody truly knows how all the so-called fundamentals factor into gold prices anyway.

No, gold has been, and is, trading on technicals. That’s why they’re being applied here.

But what if this time really is different? Yeah, we’ve heard that argument, too. We heard it the first two times we saw gold make a 20% correction (or more) since 2006. Some pundits called both of those corrections the beginning of gold bear markets too, but they weren’t. This time around is no more likely to yield different results, even as frightening as things seem.

Sooner than later, the gold dust is going to settle. The fear and red flags and bearish outlooks are going to fade from memory. The forces that were pushing gold higher for the better part of this year are going to kick in again, and this recent dip is going to end up being viewed as a necessary and healthy corrective move, probably to the $1,440 area … or at least until Europe decides to stop its bleeding.

That’s my minority opinion anyway, and I’m sticking to it.

Let the disagreements begin.

James Brumley holds no positions in gold.


Article printed from InvestorPlace Media, http://investorplace.com/2011/12/gold-is-sick-but-hardly-dead/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.