Gold's Near-Term Trend Still Pointing Downward

August 13, 1998

The gold market continued bearish last week as the yellow metal resumed its downward trend after a one-day price spike on Aug. 4.

Last week's price action in both the spot and futures markets was preceded by bearishness in the market the previous week. Gold futures on the Comex registered a bearish pattern during the trading days of July 31 through Aug. 3 known as an "Identical Three Crows" pattern in Japanese candlestick analysis. This three-day bearish pattern, identified by the opening price of each day meeting the closing price of the previous day, gave advance warning of more bearishness ahead in the gold market.

The bearish trend continued into Monday, Aug. 3, but reversed course suddenly the next day in reaction to the 300 point drop in the Dow Jones Industrials. However, this sort of reactionary move is almost always of an ephemeral nature, and not surprisingly, gold's bearish trend continue the following days of last week with the market closing successively lower on the last three remaining days. This three-day fall registered yet another "Identical Three Crows Pattern" so we should expect to see more falling in the days ahead, and gold's futures price support at $286/oz. should be seriously tested in the days ahead. At the most, the continuous contract long-term low of $283/oz. should be retested.

On an intermediate term basis, the trend looks just as bearish for gold. Gold futures are still trading in a symmetrical (a.k.a., "contracting") triangle which admittedly could break out either way, but it is beginning to look like that break may be to the downside. To gold's credit, however, intermediate-term support at $290/oz. has been repeatedly tested and has held up admirably throughout—only closing below this level four times in the past five months—so there is still some hope for gold's near-term prospects. But if we had to put our money where our mouth is we would go with the bearish forecast, at least in the short-term.

To alter our short-term outlook would require a decisive break above $300/oz.

Even worse for gold's near-term prospects is the fact that the chart showing the three-year price trend for world gold has broken to the downside from a bearish flag formation. This technical formation is similar to that of the yields of long-term T-bonds. To us, this projects a much lower gold price over the next 6-12 months. However, this should not be cause for despair among gold investors. We are firmly bullish on gold's longer-term potential and see the first leg of gold's next bull market coinciding with the onset of the Year 2000 Computing Crisis (a.k.a., the "Millenium Bug"). Each decline in gold's price should be viewed as an opportunity for investors to lightly accumulate physical bullion and numismatic coins in preparation for gold's next bull run. Conversely, short-term traders should view each rally in gold's price as a potential for profitable short selling.

From an Elliott Wave perspective, gold can be seen as having traced out two intermediate waves down in a five-wave decline. We should be entering wave three now (if we have not already) and the entire five-wave decline should carry us firmly below gold's long-standing support of $290/oz. before the next significant rally can be expected. The Gann swing chart for gold also confirms the bearish trend. Successively lower peaks and valleys have characterized gold's chart in recent weeks.

Fundamentally, the long-term outlook for gold is finally starting to look bullish again. According to recent consensus figures from more than 100 mining companies in 70 countries, gold producers have responded to the collapse in the metal's price to near 18-year lows by cutting 15 million ounces, or 466 tons, from their planned production for the next three years. Production was expected to increase by an average of 3.6 percent per year to total 88.2 million ounces by 2000. Now, gold production is predicted to grow at an annual rate of only 1 percent to 83.5 million ounces by 2001.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

U.S. ranks third in world gold production with 240 tons per year

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