There is a scenario that we would be wise not to ignore that could result in gold continuing to retreat, but it is a rather extreme one that would involve a steep rise in interest rates and probably a rise in the dollar at the same time. For this reason it is considered sensible to have fairly close stops below existing positions or new purchases now or in the near future - a logical place would be beneath last weeks low. Remember, even if you get stopped out and the picture subsequently improves, you can always climb aboard again, and won’t have missed much.
What is believed to have happened last week is that, after a steep decline, we witnessed a classic example of “capitulation” where weak hands lose their nerve and throw in the towel.
On our 1-year chart we can see how the final capitulative selloff does not look so alarming with the benefit of a couple of days of stabilisation and recovery behind us. Just looking at this chart gold appears to be at the absolute classic “buy spot”, something you normally have to wait months for. On the face of it it has it all - it has reacted back to its 200-day moving average, and it is way below its 50-day moving average, deeply oversold and is currently just above a zone of strong support. It should be pointed out, however, that it is not likely to go straight back up from here. The vicious plunge last week took its toll on sentiment and so gold is likely to thrash around for a while forming a base area, probably between about $540 and $590, which may continue for some weeks or even a month or two, which will will allow the 50-day moving average to drop down towards the 200-day. Any retreat towards $550 short-term will be regarded as a major buying opportunity, which will have the advantage that a fairly close stop can be employed to limit downside.
Now to examine the so-called parabolic rise in gold, and to put in perspective, and there is no better way to do this than by looking at a very long-term chart for gold going way back to the early 70’s. On this chart we can that the recent strong rise in gold looks modest compared to the spike of the late 70’s, and when you factor in inflation and therefore take on board the fact that gold would have to attain a price of $2000 an ounce to equal 1979’s peak, you quickly realize that any assertion that gold’s recent peak was an unsustainable, unexceedable extreme is nonsense. Sure, it MAY have topped out, if the high interest rate and dollar scenario becomes reality, and we have taken account of this, but the recent peak certainly doesn’t look that wild on this chart - it only got $220 above its 1983 and 1987 peaks at $500!
Gold stocks are another story, because of the continuing danger of a general stockmarket meltdown, which would be expected to take down pretty much all sectors with it. However, with the strong rally in the broad market last week this danger appears to have been averted for now, so that gold stocks should recover significantly in the near-term. During the recent retreat, some stocks exhibited decidedly bearish volume patterns, notably Goldcorp and the big silvers, we will therefore adopt a more cautious approach with stock themselves while this danger persists.
Silver broke down from a Head-and-Shoulders top area and its decline culminated in a capitulative panic, identical to that in gold, that has brought it down to a parallel zone of strong support in the vicinity of its 200-day moving average, which is a classic “buy spot”. Like gold it is believed to need a period of basing around the current level, that may last for a month or two, before it is ready to go up again. Note that silver may dip a little further short-term, perhaps close to $9, which would be regarded as an excellent buying opportunity.
Traders should keep in mind that there is one scenario, as with gold, that could knock silver down further, and that is the situation where interest rates get out of control and rise sharply, probably leading to a strong rise in the dollar. For this reason it is considered wise to place stops, say below $9. You could get whipsawed out doing this, of course, but there is always the option to get back in again if the picture subsequently improves, and you won’t have missed too much.
Clive Maund, Diploma Technical Analysis
Kaufbeuren, Germany, 18 June 2006
No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.