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May 15, 2011

Gold $1600 or Bust?

I often sneer at market writers whose prose basically boils down to, "The market will either go up or down." However, I am about to present such analysis to you for the gold market. The difference, I hope, is that the insights and indicators below will illustrate exactly why the outlook is currently ambiguous, as well as what developments could clarify the expected market direction.

Given the spectacular collapse in silver's price, most precious metals players are of the mind that the latest rally is history. However, as Gary over at SMT is fond of saying, when everyone is thinking the same thing, no one is thinking. As I will show, another move higher cannot be ruled out, but if gold is going to stage a rally into a new peak, price will need to get moving immediately.

Gold Daily Chart

To borrow from lingo used in the Member Letter, May 5 constitutes a daily cycle low. If the new cycle violates that low, the intermediate trend will have turned down, and we could then expect gold to trend lower for up to two months.

So, is it feasible for gold to rally directly from here? Well, mining shares may be set to bounce, which would certainly help gold's cause.

XAU Daily Chart

Stock Market Indicator

On a more circumstantial note, silver also appears to be feeling out a near-term bottom.

Silver Daily

Gold appeared somewhat resistant to the silver slaughter, so a strong rebound by the white metal could open the door to a substantial bounce by the yellow one.

On the flip side, one may note that gold and the S&P 500 have been emulating each other quite well recently.

SPX vs Gold Daily

The reason this correlation is potentially negative for gold is that stocks are due for a move into their own daily cycle low.

SPX Daily

If the near-term correlation between stocks and gold continues, and stocks move into their cycle low as anticipated, there is a strong chance the weakness in gold will induce a drop below the May 5 pivot, which as noted above, would confirm a new downtrend.

So we have a firm line in the sand for bearish resolution. As for the bullish, well, gold certainly needs to start the new week on a positive note. A move back above last week's high would constitute a big first step.


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