Was Gold's Dip to $1,130 the Bottom?

November 21, 2014
Investment Analyst & Founder of Nicoya Research

Gold forecast

Gold made an all-time nominal high of $1,923 in September of 2011. In the following three years until the present, it has been mostly downhill. This is the longest and deepest correction of the entire bull market that started in 2001. The gold price has declined by a whopping 41% over the past three years and investors have differing opinions about what comes next.

Gold bears point to the fact that the triple bottom on the technical chart failed in early November. Many believe gold will ultimately bottom around $1,000, with some forecasting a dip below $700. There were multiple days of gold closing below the important technical support level of $1,180, giving further credence to the downside projections. However, gold has since bounced back above this key support level.

gold bottom forecast

Investors should watch closely to see if $1,180 can hold the second time around, after failing in early November. Gold needs to move above the short-term downward sloping trend line (dotted) that is charted above. This would be a bullish reversal and increase our confidence that the bottom is in. The next major resistance is around $1,265, which corresponds with the long-term trend line and is directly between the 100-day and 200-day moving averages. Such a move back above $1,265 would turn our sentiment back to being strongly bullish.

Further highlighting the importance of the $1,180 price level, the chart below shows this price is also the 61.8% Fibonacci retracement level. Gold has now retraced 61.8% of the advance it made from $700 in late 2008 to $1,923 in 2011. This is the final Fibonacci support level and failure of this support greatly increases the chances of a dip below $1,000. Of course, the Fibonacci analysis suggests that the move is corrective in nature and not the start of a new bear trend in gold.

gold bear market chart

Fundamentally, it is hard to imagine that we are in a new multi-year bear market. Prices are now below the all-in production cost for many miners and we believe that such conditions cannot persist for too long. Therefore, the current move is most likely a correction within a longer-term bull market.

We believe in holding physical metals in your possession first and foremost. But it has hard to ignore the value being offered in mining stocks at the moment. In fact, mining equities are the most undervalued (relative to gold) that they have been since the very start of the bull market in 2001. 

gold bugs index November 21 2014

If gold doubles towards its inflation-adjusted high of $2,400 in the coming years, quality mining stocks could easily climb by 400 to 500%. This move may already be underway, as many of the mining stocks that we track are up 50% or more in November alone. The Gold Miners ETF (GDX) is up more than 21% in the past two weeks since bottoming on November 5th.

It is bullish to see mining equities lead the metals higher and to see silver lead gold higher. With both of these factors confirmed, we added to our positions during the first week of November. But I still have plenty of powder dry, as significant downside risk remains until gold bounces back above $1,265.

Making short-term price predictions in this market is a fool's errand. I have no idea where the price will be next week or even next month. But it seems to me that the upside potential in the precious metals market dwarfs the downside risk at this juncture. I think $1,130 gold and $16.59 GDX was likely the bottom. I plan to keep buying the dips with the view that prices will likely be much higher over the next 12-24 months.

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Jason Hamlin

Jason Hamlin is the founder of Nicoya Research and has been publishing investment research at goldstockbull.com since 2006. His background is in data analytics for the world’s largest market research firm. Jason consulted to Fortune 500 companies around the globe, including Nestlé, Johnson & Johnson and Del Monte. Jason eventually left the corporate world and leveraged his analytical skills to trade stocks successfully full-time. Jason is a contrarian, cycles investor and student of Austrian economics. He is a proponent of sound money, limited government, decentralization of power and the non-aggression principle (NAP). His website is at nicoyaresearch.com.  You can reach Jason at: https://nicoyaresearch.com/contact-us/.

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