Gold: Where to from here?
By Colin Twiggs
September 14th, 2011 3:00 a.m. ET (5:00 p:m AET)
Gold is rising in a super-trend which has lasted for more than 10 years. The primary trend, however, is accelerating as the debt crisis in Europe evolves. European banks are now in a precarious position and default of a single debtor nation would cause a crisis of confidence. The situation is similar to the 2007 sub-prime crisis which was accompanied by a similar surge in demand for gold.
Two events stand out. In March 2008 the Fed rescue of Bear Stearns reassured the markets, easing demand for gold and resulting in a 30% retreat in the spot price from its peak at $1000/ounce. The second event was the September 15th collapse of Lehman Brothers. Gold surged 20% in a matter of days, as confidence in the Fed's ability to contain the crisis was shaken, before settling back at $700 by November. It then commenced the current bull run, climbing 170% so far from its 2008 low.
The question is: are we facing a "Bear Stearns" event that will reassure financial markets or another "Lehman", causing a flight to safety? Current European dis-unity suggests a crisis of confidence and surge in demand for gold.
The daily chart shows a bullish ascending triangle, indicating further accumulation. Breakout above 1900 would signal a fresh advance to 2100*.
* Target calculation: 1900 + ( 1900 - 1700 ) = 2100
The situation can change rapidly, however, and some contrarians believe that gold is over-bought. Reversal below support at $1800 would break the ascending pattern and rising (secondary) trendline. All bets are then off and reversal below $1750 would complete a double top, threatening correction to $1500.
Amex Gold Bugs Index broke through long-term resistance at 600 last week and is now retracing to test the new support level. Respect of 600 would confirm a primary advance to 700* — a bullish sign for spot gold prices.
* Target calculation: 600 + ( 600 - 500 ) = 700
The strengthening dollar caused crude prices to soften, with Brent crude headed for another test of support at $104/$105 per barrel. Failure of support would warn of a down-swing to $90, but breakout above the descending trendline is equally likely and would suggest a new primary advance.
* Target calculation: 105 - ( 120 - 105 ) = 90
Without faith in his own judgment no man can go very far in this game. That is about all I have learned — to study general conditions, to take a position and stick to it.
~ Jesse Livermore in Reminiscences of a Stock Operator by Edwin Lefevre.