After gold’s losses of the past
couple of weeks there is increasing talk about its bullmarket
being finally over. In this update we will use long-term charts to determine
whether these claims have any substance.
On its 12-year chart, which goes back
to the start of the bullmarket, we can see that the
top boundary of the uptrend from 2006 is defined by the line drawn across 3
important peaks, and it is from this line that the parallel supporting trendline beneath is derived. While there is no law
stating that the lower trendline has to be
parallel, it is nevertheless likely, and it is regarded as no coincidence
that the strong support at recent lows, which needs to hold, and this lower trendline are more or less coincident at this time
– if the current reaction continues this is where it should stop and
reverse, although as we will see later on the 6-month chart it may not drop
back any further than where it is now.
![](http://www.24hgold.com/24hpmdata/articles/img/20121224PLA08401.gif) ![](../style/all/img/bouton/Zoom_in_6.png)
Having gotten a perspective on the entire bullmarket,
we will now look at the action from the 2006 peak in more detail on a 7-year
chart. On this chart we can see more clearly where gold will arrive at a
“buy spot” if the current reaction continues, in the green oval.
Since the August 2011 peak, gold has mostly been trading in a horizontal box
or rectangular trading range bounded by the clear lines of support and
resistance shown. On a further dip into this support, which will bring it
close to the major supporting trendline, gold will
be a buy, and as this important support above $1500 is so clearly defined,
the point to set stops will be a little below $1500. This mechanical approach
affords a highly favorable risk/reward ratio, as positions would be closed
out for a minor loss if the support fails, while upside potential from this
entry point is obviously very considerable.
![](http://www.24hgold.com/24hpmdata/articles/img/20121224PLA08402.gif) ![](../style/all/img/bouton/Zoom_in_6.png)
A lot of traders were upset last week
when gold dropped below its early November lows, in the process dropping
below its 200-day moving average, and grumbling about the dastardly cartel
and their “dirty tricks department” bubbled up again. On the
6-month chart we can see recent action in detail, and it might not be
anywhere near as bad as it looks at first sight. On the contrary we could be
at a buy spot right now - for what we might just have seen is the completing
C-wave of a 3-wave A-B-C correction to the strong upleg
in August and September, which still looks like an impulse wave (advance in
the direction of the primary trend). The price has now arrived at the bottom
of the parallel channel shown and at a zone of significant support in an
oversold condition. Also, last week’s selling looks rather panicky and capitulative, the sort of thing you associate with weak
hands.
![](http://www.24hgold.com/24hpmdata/articles/img/20121224PLA08403.gif) ![](../style/all/img/bouton/Zoom_in_6.png)
The latest Hulbert Gold Sentiment, courtesy of www.sentimentrader.com shows
that the sentiment pendulum has swung from being very bullish a few months
ago, and thus a sign of a top, to getting bearish again, which increases the
chances of a reversal to the upside soon.
![](http://www.24hgold.com/24hpmdata/articles/img/20121224PLA08404.gif) ![](../style/all/img/bouton/Zoom_in_6.png)
Gold’s COT charts did call the retreat of recent weeks, with high
Commercial short and Large Spec long positions having built up ahead of it,
as the latest COT chart below shows. The chart is now less useful, as
readings have moderated into middle ground, and thus don’t give much of
an indication one way or the other.
![](http://www.24hgold.com/24hpmdata/articles/img/20121224PLA08405.gif) ![](../style/all/img/bouton/Zoom_in_6.png)
What about the dollar? – a dollar plunge would
be “just what the doctor ordered” for gold’s convalescence
and swift return to ruddy cheeked health would it not?
The dollar index chart looks dire. On
its 18-month chart we can see that a large Head-and-Shoulders top appears to
be completing. While these patterns can sometimes abort, it indicates a high
probability that the dollar will break lower soon, and if it does it can be
expected to drop quite rapidly to the next important support level in the
73.50 - 74 area. Clearly such a drop is likely to drive a substantial rally
in gold and silver. The fact that gold and the dollar dropped together over
the past week or so is regarded as a temporary anomaly.
![](http://www.24hgold.com/24hpmdata/articles/img/20121224PLA08406.gif) ![](../style/all/img/bouton/Zoom_in_6.png)
At the same time, the broad stockmarket look like
it about to roll over and head south. On the 15-year chart for the S&P500
index we can see how its big bearmarket rally has
been steadily decelerating as it has approached the massive resistance at its
2000 and 2007 highs, with the uptrend approximating to a bearish Rising
Wedge, but more accurately defined by the large bearish “Distribution
Dome” shown on the chart. While the pattern could abort, with a
breakout to new highs – possible if the dollar craters – by
itself this chart points to a potentially severe decline. One horrifying
possibility is that the dollar and US stockmarket
drop in tandem as the US economy, finally overcome by its massive debt burden
with the eventual threat of runaway interest rate hikes, plunges into the
abyss.
![](http://www.24hgold.com/24hpmdata/articles/img/20121224PLA08407.gif) ![](../style/all/img/bouton/Zoom_in_6.png)
If the Head-and-Shoulders top in the US dollar were to abort, and it rallies
as a result of a “dash to cash” as in 2008, then it is easy to
see how the US stockmarkets could then plunge,
which they look set up to do. In this situation what would happen to Precious
Metals stocks, which have recently looked really lame?
Our 5-year chart for the HUI index
shows that the sector looks vulnerable to a brutal decline if the broad stockmarket plunges, as a large potential
Head-and-Shoulders top is completing in this index. In this situation quality
junior mining stocks which have typically lost 80 – 90% of their value
over the past couple of years, might only lose another 50 – 75% of
their current value, so that a stock which has dropped from say C$2.00 to
C$0.20 over the past 2 years, might only drop to say C$0.07, where needless
to say, it will probably be a great bargain.
![](http://www.24hgold.com/24hpmdata/articles/img/20121224PLA08408.gif) ![](../style/all/img/bouton/Zoom_in_6.png)
In conclusion it is a complex and messy picture, but at least we have the
clear parameters that are set out in this update. Gold could reverse and take
off higher from here, and is viewed as a buy on any further retreat back into
the support above $1500. Failure of the key $1500 level would be a bearish
development that would call for the closing out of positions or at least
protecting with hedges. The dollar looks set to break down, but so does the stockmarket, which is an extraordinary situation as
normally when the dollar drops, stocks rally to compensate.
To finish on a supremely positive
note, at least we survived the Mayan prophecy for the world to end on 21st
December. After that 2013 should
be a cakewalk!...
![](http://www.24hgold.com/24hpmdata/articles/img/20121224PLA08409.jpg)
Photo by Maund
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