Gold has been trading wildly recently. And little wonder, considering the global hunt for liquidity. Where shall the indiscriminate selling stop? In other words, the million-dollar question is, how low could gold go during this decline, and what’s the most likely price level at which the buying opportunity will present itself with an excellent risk to reward ratio.

In short, in our opinion, gold is likely to decline in a volatile manner, until it breaks below the declining support line that is based on the most recent two lows. Just like it did in 2008. Please take a look at the chart below for details.

The very important confirmation of the usefulness of this trading technique comes from the 2012-2013 slide.

Over a year ago, we created a chart based on the possible similarity of the final slide in the PMs to the 2012-2013 slide. We wrote comments on it and we called them “Letters” to the future investors. While the situation is not as similar to the 2012-2013 slide, as it is to the 2008 one, this chart seems useful anyway.

The key thing visible above is the slide well below the declining support line that was based on the previous local lows. It’s not that important how much gold broke below this line, but that it provided a great temporary buying opportunity just a day after the breakdown.

This is very similar to what we see on the 2008 gold chart.

Now, the 2008 decline was faster (overall) than the 2013 decline, and the current slide is even faster, so it seems that it would not take two trading days to form the bottom after the breakdown, but that it would rather take place on the intraday basis.

1. The area marked with red rectangle – the bottom in gold – was characterized by a clear show of strength in gold. Gold reversed and closed the day higher despite a move higher in the USD Index. We will be on a lookout for this kind of confirmation as it might prove extremely important also this time.
2. The precious metals market formed its final bottom, when stocks formed their local bottom at their previous local low. This might be a useful clue, but it doesn’t have to be. It’s not...

After reaching our March $1700 target, gold entered a sharp, liquidity-driven, selloff. Prices plummeted to $1450 but have since recovered ($1642 as I write). So is the bottom in, or should we expect more selling? Our cycle work suggests more selling and a sustainable low in May or early June.

Caution Advised 

The commercial hedgers and gold manipulators are good at two things. Making money and tricking retail investors. One of their favorite tricks is to push prices back to or just above a recent high to trap breakout buyers. In this case, they may try to push gold above $1704. Once everyone has bought, then they flood the market with sell orders. I’ve seen this too many times to count, so be careful if gold approaches $1700. 

COT Update

The recent commitment of traders (COT) report shows commercial shorts have fallen to 311,823 from a record 385,612 net-shorts set in February. A decent reduction but nowhere near where I’d like to see it. A decline below 200,000 contracts seems appropriate.

Gold

Below, you’ll notice some regularity to the peaks and valleys for each cycle. The global meltdown that began in March skewed the near-term chart, but it should not abort the cycle. The typical decline into a 6-month low takes anywhere from 4 to 10-weeks before prices bottom. The recent plunge to $1450 lasted just 5-trading days, that’s way too short to be considered an intermediate-term decline. Consequently, I think it’s too early for a sustainable bottom in precious metals. My preferred timeframe remains late May to early June. 

Silver Weekly

I love silver as an investment, but I have to say, its performance has been disappointing. While gold is pressing to new multi-year highs, silver is making new multi-year lows. The good news is, prices were able to claw their way back above the $14.00 level, potentially negating the March breakdown. If silver can stay above $14.00, then the low is probably in. Collapsing back below $14.00 would support a deflationary period, and we could see new lows temporarily. 

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