Our previous two commentaries were dedicated to putting current events into perspective and trying to find analogies between the correction that we currently experience, and similar events in the past. After all, the best way of predicting the future is to look at the past. The decline that we are currently witnessing is very rapid and the situation changes on a daily basis, meaning that sometimes we need to change our view on the market a couple days after we post a new commentary. In that case, we normally send a Market Update, or a Speculative Alert to our registered Users, but we are not able to provide you with another essay until next week or so.

We received many e-mails from our Readers, who are concerned about the healthiness of the bull market in the precious metals and also from speculators who lost their money betting on the rise in gold and silver. We therefore find it appropriate to post another commentary with current events in mind. Our previous essays focused mostly on precious metals stocks, however today we will analyze gold itself.

Each day of the correction makes us more convinced that its days are numbered. To support our view we have prepared a chart (courtesy of www.stockcharts.com) on which we have marked several signs that make us believe that this decline is over or very close to being over.

First of all, price of gold is now approaching the long term trend line, which alone could be enough to stop a rapid decline like the one we currently experience. Technical analysts usually agree that the longer the time frame (used to build a particular trend line) is, the stronger the support should prove. This is exactly what we can see on the chart above.

Next, if calculate take the Fibonacci retracement of 38.2%, for 3 year time frame, we will get very similar support level that we get from the abovementioned trend line. Combining these two long-term support levels makes it even stronger.

Was that not enough, we have two of the popular indicators (marked with red ellipses on the chart) at the levels that suggest extreme undervaluation and point to a sharp bounce from here. We also get lower lows in gold without lowers lows in the gold stocks – a very bullish sign.

There is one more interesting analogy between the previous consolidation and the current one – we marked it with blue ellipses. Please note that if we take the ‘rapidness’ of the previous fall/consolidation and copy it to the high of $1000+, we will get the same price / time frame for the end of the current consolidation that the aforementioned tools suggest! By ‘rapidness’ we mean the steepness of the line connecting the top with the bottom ending the consolidation pattern.

Summing up, we are in a secular bull market in commodities and also in the precious metals. Corrections from time to time are not only imminent and healthy, but should be expected. The correction that we have right now is extraordinary in many terms, but after several years, the current levels (as well as the previous high on the HUI and gold/silver) will probably be history, with price being substantially higher. If you are a speculator you might want to trade these consolidation patterns, but you need to be prepared for even for mostly unexpected events , such as the recent rally in the USD. This usually means using relatively little capital for your speculative transactions.

As far as long-term precious metals investors are concerned, this correction should not trouble you, as the excellent fundamentals of this sector have NOT changed. This implies higher prices eventually, even if you will have to bear with temporary sell-offs along the way. It seems that the best approach for long-term investors would be to wait at least until the public enters the market and the euphoria phase begins. It is doubtful that we are there yet and in our opinion there will be many possibilities to sell your gold stocks with HUI above its previous highs. As far as the ultimate top is concerned please go the Tools section on our Website and click ‘Top or not?" link.

Of course the market might prove us wrong, as nobody can be right 100% of the time. Should our view on the market situation change substantially, we will send an update to our registered Users along with suggestions on how to take advantage of it. Register today to make sure you won’t miss this free, but valuable information. You’ll also gain access to our Tools section. Registration is free and you may unregister anytime.


P. Radomski