An intelligent person knows that gold is the one true store of value and yet its been declining for two years. Gold topped at 1,923.70 back in September 2011 and has given back close to 40% of its bull market gains since then. The low so far has been 1,179.40 posted on June 28th and since then the price has rallied 151.90 to close on Friday at 1,331.30. As you can see in the following chart the bottom did not reach any of the two important support areas (1,155.70 or 1,087.50) and I view that as unfinished business, and I know the market doesn’t like unfinished business:
As I mentioned last week I know that a number of good analysts have called a bottom, but I’m still not sure. The lack of energy contained in the current move is worrisome. By that I mean that gold fell from 1,350.00 to 1,179.40 in just seven sessions and then took seventeen session to recover that same lost ground:
Recently the price ran up against good resistance at the 1,350.00 area and then turned down to close out the week at 1,331.90, and the question is where do we go from here? The correct answer is that it is too early to tell. As long as gold holds above 1,302.50 it looks okay, but it needs to break out above 1,350.00 to maintain its momentum. Don’t forget that in a significant move price often revisits the area it broke down from before it continues its decline, and so far that’s all we can say about this reaction. The most likely scenario here is that the trend line that sits around 1,346.00 holds and gold turns down for one final run at the 1,089.50 support. The next most likely scenario is that gold continues higher for another thirteen sessions, to the trend line at 1,374.00, and then turns down.
The least likely scenario, based on the available evidence, is that gold has bottomed. I’ve lived through bottoms in gold in 2003, 2006 and 2008 and there wasn’t much question about them being the bottom.
Finally, bottoms in gold and the subsequent rise in price have been in each case preceded by a bottom and the beginning of a move higher in gold stocks. As you can see in the following chart of the XAU, that just is not the case:
So far the best thing you can say about this index is that it’s recovering as the price of gold moves higher, but it certainly is not leading the gold price higher. So until we see the right ingredients in the right order, I would be careful about buying into the “gold has bottomed” argument just yet. I believe gold will bottom within the next month and so I would try to exercise just a little more patience before jumping in with both feet.