"We must confess that we were surprised to see the spot future Gold price scorch all the way up to $US 721.50 on the close ($US 728.00 intraday high) on May 11. This is a good $US 10 above the LAST resistance point for Gold short of the $US 850 all time high set in January 1980. In September 1980, Gold reached $US 710-12 at the top of a five month rally which began from the $US 480 level set in March. That $US 480 level was the bottom of Gold's first precipitous fall from its January 1980 highs."
(The Gold Bull Market - May 12, 2006
Of course, spot future Gold only held that closing $US 720 level for the one day - May 11. The next day it was back down to that resistance point of $US 710. And this week, Gold has seen two days of $US 20 plus falls push it all the way back to just below the $US 660 level. That September 1980 resistance level, the last one before the January 1980 all time high, has certainly maken its mark this week.
This correction in Gold came, as it has done for years now, as concern about the future jumped substantially in the paper markets. There has been an abrupt turnaround in interest rate expectations in the US, from a rising hope for a pause in rate rises to the rising fear that the markets are not going to get one anytime soon. That led almost instantly to the global stock market selloff which started as soon as the FOMC announced its latest 0.25% rate rise on May 10.
The "reverse Gold barometer" continues to function perfectly. The bigger the actual or potential crisis in the paper markets, the higher the chances of a sharp correction in the $US Gold price. We've seen many of these over the Gold bull market so far. Yep, this one was "sharp", to say the least, but so was the HUGE price run up which preceeded it.
Here are the relative performances of $US Gold, the $US Index, and the Dow since Gold broke above $US 300 to stay on March 27, 2002:
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On May 10, the Dow closed within 80 points of the all time high it set almost six and a half years ago in January 2000. Since then, it has lost almost exactly 500 points. Not as much as Gold on a percentage basis, but the Dow is anything but a "reverse barometer".
On the daily chart, after spending the first four days of this week hovering just below its 10-day Moving Average (MA), Gold fell $US 23.40 on Friday, May 19 to break below its 20-day MA for the first time since mid March when it was still trading around the $US 550-560 level. The first thing to watch for on this chart is whether the 10-day MA can remain above its 20-day counterpart. If it can, this correction will resolve itself quite quickly.
On the weekly chart, Gold shows its first "down" week since the week ending on March 10, 2006. That's more than two months ago. Yes, it's a healthy downturn but the price remains comfortably above both 20 and 40 week MAs and the 20 week MA remains comfortably above its longer term counterpart.
The $US 2 x 3 point established a new and much steeper uptrend line in early April anchored at the $US 540 lows. The steepening of an uptrend usually (there is no such thing as "always" in technical analysis) signals an acceleration of the uptrend. The acceleration duly occurred. Now, we have had an abrupt turnaround, signfied by the two lines of "0"s on the chart, both resulting in the two $US 20 plus daily losses Gold has suffered this week. The obvious support point on this chart is the double top around the $US 636 level. That does not mean that Gold WILL drop that far. It simply means that if it does, that is where the support should cut in.
Here's another perspective - a comparison between Gold's 2002 low and its present price and the $US index 2002 high and its present "price". All data is on CLOSING levels:
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Last week, the strategic $US 5 x 3 point and figure Gold chart had risen $US 175 in a straight line with no corrections or even downturns whatsoever. There had not been a rise like that since the very late stages of Gold's final push to its January 1980 $US 850 high.
Look at the MASSIVE acceleration on this chart since it broke above the broken red line connecting the 1982 and 1987 highs. Look at the even more massive acceleration since the chart "double topped" at the top of its channel. Finally, look at the massive ($US 250 - 500) base from which this price surge has grown.
As we said here last week: "We don't know where the next downturn on this chart will take place. It may well take place from $US 720 since Gold has now reached the last but one of the resistance points on the way to its all time $US 850 high. We'll see. But whatever happens, the bull market is - to put it mildly - perfectly intact."
The downturn has come - from the $US 720 level. The last but one resistance point has made its presence felt. Thus far, it has retraced 36.5% of that vertical $US 175 rise mentioned earlier. That's about par for the course for the size of these type of corrections, although its speed is definitely faster than has been the norm on the bull market so far. But so was the rise which