Sunday, May 12, 2013

Gold Update: Important Key Levels for the Long Term

Due to recent price action in Gold I have been getting more and more questions concerning the long term trend and if the long term uptrend in Gold prices is still in tact. So I figured I would spend a few moments to create a new post on the subject. To begin let's go all the way back to the beginning of this bull market and analyze what has happened in the past and compare it to what is happening in the present.
To begin we start we the top most chart in this post which happens to be a monthly chart of the spot Gold futures contract. We see a long term bull market which began roughly around 1999 - 2000 and has moved up some 660% since.
Now let's take a look at the previous bear market corrections inside the long term uptrend. As you can see we have had four (not including current) corrections in Gold over the span of the last 13 years or so. The first two corrections produced declines of 24-25% respectively, the third came in 2008 and produced a 34% decline while the fourth only produced a decline of 15%.
Why do we need this information? Well we need to figure out first and foremost the supply and demand pattern for the particular market your interested in. Second we need to see if this is something unusual or status quo.
So if we now look at our current drop from all time highs, even though in terms of dollars it is the biggest drop we have seen, in terms of percentages it gives us approximately a 30% drop. So in this case it's so far not a move that is completely out of the ordinary. And we also remain above the 38% retracement level of this entire bull market run up. So given current market data the long term bull market in Gold is actually still intact.
Now going forward what should we be looking for?
The bottom chart is a weekly chart of Gold prices over the last couple years. On it I have highlighted a couple extremely key levels that will tell us all we need to know about the direction of Gold going forward.
The first key level above is strong resistance around $1526.70 - $1560.00. At any point if the market should trade above that level for any length of time, that would be considered very bullish and in which case we should be setting up for an eventual push to new all time highs above $2000.
The second level below is strong support and it comes in between $1266.50 - $1285.50. This area has confluence with the 38% retrace level of the entire bull market, previous bull market high support and matching 34% drop like that of 2008. This area should be strong support on any move lower, if the market would happen to spend much time trading below this level that would be a serious warning sign of long term trend change.
The third and final level below comes in around $1227.50. To me this would be my line in the sand for any future Gold investments. If the market were to spend time trading below this level, even though we could very well get a bounce, given the level of volume that occurred on last months breakdown, I would seriously doubt the bull market would resume anytime soon.
So I've laid out the current structure of the trend and some key areas to do business in. If I had to give my predictions I am leaning towards one last push lower to the $1266.50 - $1285.50 area, bottoming out and then making another run to one more all time high above the $2000 mark before all is said and done.  But we'll see.