The Chart Every Gold Investor Needs To See

Gold Bars

There has been much debate about whether gold’s nose-dive below 1200 in June was the bottom for the yellow metal or not.

In fact, gold’s recent 18% rally from June to August has probably raised more eyebrows than Miley Cyrus’ bizarre “performance” on MTV (ahem!).

The gold bulls are shouting “the bottom is in”. Social media sites are already banging the drums for $5,000 gold (if that itself is not a red flag, I don’t know what is).

Now, I am not going to be hypocritical here.

I was also in the gold bull camp until May of this year. Back in April, I saw gold’s decline as merely a temporary “correction”.

I shall now explain to you why I switched to the Bear camp and why I believe that far from having reached a bottom, gold’s downward trend will continue until we probably reach just below $1000.

Take a look at this monthly chart of gold from 2009 to 2013:

Gold monthly chart

Notice the red line on the chart. That is the monthly 50 moving average (MA), a key technical level on a chart observed by many hedge funds and institutions.

When a market is above its monthly 50 MA that is considered to be bullish for that market and an important sign of an upward trend.

From 2009 to April 2013 we remained above the 50 MA. This was bullish for gold. This is why gold’s 17% drop in April still did not affect my bullish outlook for gold because it had merely pulled back to its 50 MA.

However, all of that changed when 2 things happened in May of this year:

1. Fed Chairman Ben Bernanke opened his mouth and said he is considering taking his foot off the “printing” gas pedal. In other words, he is going to “taper” QE – the $85 million dollar bond buying program – this year.

2. Gold closed below its 50 MA for the first time since December 2001.

This officially put gold in a bear market and a confirmed downward trend.

It is important to remember that when the facts change, we MUST change our minds. It is irrational and dangerous not to do so.

So why do I still believe that the downward trend will continue and that the June lows are NOT the bottom for gold?

Well, it seems that most people are forgetting the scariest words in finance: “Reversion to the Mean”.

“Reversion to the mean” means that markets never move continuously in a single direction. There is a tendency for markets to return (or “revert”) back to their averages (“the mean”) before continuing in their original direction.

For example, after the housing market crash of 2007, nobody could tell if a rise in house prices meant a bottom or a reversion to the mean before house prices plummet again.

Now take a look at these blue arrows on the same chart of gold:

Gold reversion to the mean

You will see that during the 2009-2011 rally, gold did not move continuously upwards. As the blue arrows show, gold reverted back to its mean, the 8 monthly moving average, at least 5 times during that rally.

Now that we are below the 50 MA and arguably in a downward trend, gold’s recent 2 month rally is probably nothing more than a “reversion to its mean”.

I realise that I could be wrong. If gold continues to rally and closes above resistance at 1500 and 1520, then I will change my mind and become aggressively bullish on gold.

However, I doubt that will happen, for three reasons:

1. The bullish case for gold which made it rally from 2009-2011 was based on the promise of endless QE and pumping of the economy by the Fed. That promise is now gone with the threat of tapering by December this year.

2. Gold’s historical average for over 50 years has been 3.4 times the CPI. If gold is moving towards this average (which I believe it is) this puts the likely price of gold around $800 by 2014.

3. Finally, despite the oversold readings, sentiment towards gold still remains bullish. Where is this “fear of gold” that some commentators are talking about?

As I have said many times, until we see “blood on the streets” – I mean genuine fear of gold – we will not see a bottom for the shiny metal.

Note: in the short term gold could still head higher to test resistance at 1450 and 1500. So short term we could still be long until we reach those levels and then consider shorting it at those levels.

Was this article helpful to you? Do you agree with the points discussed? Let us know and leave your comment below even if you disagree.

Alessio Rastani is a stock market trader at www.leadingtrader.com

33 Comments

  1. Sorry Alessio but I disagree. Gold has bottomed. Goldman Sachs and the rest of the banksters have been buying gold secretly whilst they’ve been telling everyone else to sell. That is so typical of these banks.

  2. HI Alessio,

    If you think the Fed is going to taper… I would look to what Jim Rickards says.
    We will see what happens. But I am long on gold.

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  4. I agree with your ideas about Gold Plz explain another thing that what major support Gold is taking I think 1350 are agree with me
    It is your long term view but in short or medium turm what kind of statagy should we do

  5. Hi Alessio,

    Thanks for this analysis. I am rather bullish on gold long-term, but I was also waiting to take a position until there was “blood on the streets”. Even when it plunged below 1200, all Iheard was

  6. I think you might be a little too pessimistic regarding $800, but certainly $1000 is achievable. Will be interesting to see where it goes from here. If it does hit $1000 or below then gold miners should surely be a buy from there as I’d expect a gold price recovery as other factors start to shake the world economy and gold is seen, once again, as a safe haven asset.

  7. Hi Alessio,

    Great technical reading, as always!

    Each week, we check in on the CFTC reports of gold positions and update them on our site here:
    http://goldundercover.com/gold-tables-hedge-fund-bets-27-august-2013/

    As you know, the reports are historical (being available only during every weekend for the positions as of the immediate previous Tuesday) and since they partly relate to trading funds, there is every chance that opportunistic funds which indulge in short-term trading can easily use such reporting to game other smaller players. Do you think this is happening and on what scale?

    Similarly, do you think that the 50-day MA charts that you use are being manipulated by the dominant players, notwithstanding that gold is a massive market that entails massive financial clout to move either way?

    Look forward to your usual incisive input.

    Much Thanks,
    GOLDundercover

  8. Hi Alessio,

    Thanks for this analysis. I am rather bullish on gold long-term, but I was also waiting to take a position until there was “blood on the streets”. Even when it plunged below 1200, all I heard was: “It is the low, production costs are higher than that”. So I did not buy. What bothers me lately are the comments from investors that I highly respect, Marc Faber and Jim Rogers. They both agreed that we might have hit the low at 1180. This made me think that it might not be bad to grab some metal in case they are right… and they often are. I must say it was nice to read the confirmation of my point of view on your blog. Hopefully we are rright and there will be better levels to get in.

  9. Very thorough Alessio. But This Market I Have learned, Is Very Tough To Predict.

  10. Hey allesio,
    I think many people are going to be bullish just like you if gold goes above 1500. This is why the big resistance will be 1600. This is the place where the bigger correction will take place

  11. Your thoughts are quite possible. I believe we are going to consolidate for a couple of years between the 1400 and 1000 mark. When everyone stops talking about gold, gold has hit a bottom.

    Do you feel the same way about Silver?

  12. I agree with all that you said.In my opinion the debt ceiling that the u.s. is gonna hit in mid-october will very much likely be the catalyst for a stock market crash.The refusal to raise the debt ceiling would amount to the United States refusing to pay what it already owes so the fed has no other options other then tapering qe(IMO the fed will cut the $40billion in MBS) to compensate for the rise in debt ceiling.Consequently stock market will crash;the usd will surge and precious metals on the contrary will plunge.Debt to gdp ratio,unemployment figures and mortgage rates will all go up parabolically and u.s. will enter into another recession which in my opinion will be worst that that of 2008.The u.s. will start losing its credit rating the way the piigs countries did and consequently the usd or petrodollar will start losing its value at a fast pace.There is where the precious will go significantly higher to approximately $2500 gold and $65 silver.

  13. I am inclined to agree but at this point I am on the fence. I want to see what PMs do with a rising US$ again. If, as I suspect, they will pull back in line with your forecast then I shall more likely firmly be in your camp.

  14. I think you are bang on, Alessio. There will EVENTUALLY be blood in the streets but we are not quite there yet. EVERYTHING is a manipulation. I believe they will attempt to suppress gold even one more time. This is in order to shake the confidence of those desperate or skittish to liquidate in order get much needed cash. Especially those all in long. Then the banks will come in and scoop more of it up to cover their shorts. Banks like JP Morgan et al. Wash, rinse, repeat. Meanwhile this will, also, as a by product test the miners. It will be separating the men from the boys allowing for more buyouts or takeovers. My two cents / sense. Thanks for the analysis. All the best!

  15. I agree. I think Gold will drop down towards $1100 but I must admit, I am horribly strained with the fact that I missed much of this reversion towards the mean (or at least didn’t put more in). I am long gold (in the 5+ year range) but feel that it can’t continue a strong upward trend until it really shakes loose the gold bugs. Until I feel like puking from how low it’s gotten then I am trying to avoid buying. πŸ˜‰

  16. Alessio:

    You make a compelling case for gold’s decline but, to $800 by 2014? If what you say is true, then I’m buying more of it as I believe it will become bullish. Two reasons: 1. For the past 12 years gold has been on a steady rise and 2. I believe the dollar will fall significantly and gold will be the wealth preservation from the dollar’s eventual collapse!

  17. Gold has NOT bottomed! I don’t know why there are so many “Gold Bugs” smoking Hopium still. It’s like they never learn and they have this endless hope. But then again, all this hope is most likely from useless Fundamental Analysts who think they can guide a Gold Bugs into their web of hopium-predictions (all who have been countless times wrong on Gold’s price action!) – whether that be Eric Sprott, Jim Sinclair, James Turk, Peter Schiff, Mike Maloney ..and the list goes on.

    Let’s look at the facts here. The current price action is rule by Technicals NOT Fundamentals. Yes, I will agree that metals will soar at one point and I will also agree that the dollar will be worthless. However, this does not mean that such circumstances will manifest itself anytime soon – it may take 2 years, 5 years or even 10. Gold bugs can go on and on about the debt and Fundamental reasons – they have all these reasons about WHY they’re buying, but not one as to why Gold is doing what its doing (besides the lame excuse of “Manipulation”). I am so glad that I am no longer a Gold bug (I appreciate my physical metal but not attached like others and certainly without hope – it gives me more of a clearer picture of what will most likely occur in the short term).

    Fundamental Analysts will NEVER be correct, unless its luck, re short-term price action; They can only give you an overview. Technical Analysts can only give you the short-term price action and I am in agreement with Alessio here. You’ll soon see GC (gold) take out its lows easily and will go below $1000. $1000 is nothing more than a psychological number, not really a strong support. I’m looking at either the 200 MA or 2006 lows on the Monthly Chart so that will be around high 600s – high 7000s as my last and final target.

    The ONLY way to know whether Gold has bottomed is when Gold comes down to test the recent lows of $1179 price point and if there is heavy buying momentum; Gold would have to do more than just a mere “bounce”. If it pierces $1179, that’s it – get ready for Gold below $1000

  18. Cool article.

    I think I’m safe assuming, most the world’s gold lies in vaults.
    Where is the value in that?

    Another point,
    Price target $800 assumes reversion to 3.4,
    but also assumes CPI stays flat.
    If we assume deflation AND reversion, target gets even lower.

    Hopefully you are right,
    and we get a good swing lower to 800 in short term.

    But hopefully that’s just short term,
    and long term gets even more reasonable.

  19. Excelent video I am a small investor but these video’s help me understand the markets more

  20. The problem with relying solely upon charts should be obvious to gold investors. The fact that shallow fools place so much faith in them is the ONLY reason why they have any meaning, as they can become “self-fulfilling prophecies” if enough people are stampeded into buying/selling by charts alone. Gold is the most artificially manipulated commodity traded. Central Bankers have an infamous love-hate relationship with gold. They’ll “lease” it for a paper “return” and never inform their constituents that they’ve done so. Central Bank surrogates (i.e., Goldman-Sacks, JP Morgan, etc.) will “sell” mountains of paper gold that literally doesn’t exist, purposely driving physical gold prices down to levels that devilishly “paint the charts” for fools who invest by them alone. And finally, Russia, China and BRIC nations have been feverish buyers of gold. They see the end of Dollar dominance coming….. and so should idiots who place all of their faith in gold charts.

  21. Hi Alessio,

    These are good Western reasons to be cautious but how about the East? Japan is debasing the Yen (I suspect others will follow) and we are told the East are net buyers of Gold too?

    Andrew

  22. Hmmmm. intersting analysis Alessio, however I neither agree nor disgree with you this time around.
    Let’s take this from a quantative prospective:
    1) There is much higher demand now for metal gold purchases than 1989
    2) Bernanke has decided to close his mouth (for the moment)
    3) The Comex has not released any conflicting news or resorted to cash only settlements

    On the other hand:
    1) Carney is fighting with the UK housing beginning to heat up, (he claims he will burst bubbles)
    2) Us may go to war ???
    3) China’s production is up 7.9%

    That being said although I feel you were a little premature before when you claimed that then gold was heading lower, I fear you suffer from ‘Rogersitis’ an affliction that affects Jim Rogers in his market predictions. (It means that your assumptions may be somewhat premature, Mr. Rogers even publically admits of this affliction.)

    IMHO: I got caught out with bad advice of lower gold market prices earlier in the year, but now I can see that was a false flag (expensive lesson).
    So, my prediction is that gold may drop down to $1250 again or even $1139 but I do not agree that gold will drop down any lower than that. Lower market rates would imply to mines to shut down or soft-pedal production output, either way this would keep the falling prices and lost profits to a minimum.

  23. TJ – with respect, as you will see from the article, I do NOT solely rely on “just charts”. I do take the fundamental basis into account. And I realise the pitfalls of relying on charts only. BUT – let me say 2 things: (1) the arguments about gold being manipulated while true, have been talked about for decades (it is not news) and (2) you should not dismiss technical analysis as being for “fools”. Many traders including myself make very good and profitable decisions based on technicals. It is NOT whether you should use charts but HOW you use them that matters. I am a firm believer in the Dow theory and it has served me well

  24. Phil – I understand your point. But the fact that mines will shut down if gold goes lower does not predicate that gold will NOT go lower. There is an old phrase that says the time to buy is when there is “blood on the streets”. So maybe a disaster for the mining industry is precisely what is needed to make enough people scared of gold and then we shall see a bottom. It seems to me that one’s personal biases can sometimes affect one’s judgement including my own. By the way – you said you were given “bad” advice early in the year of gold going lower – well that was surely good advice because they were correct – as long as you traded the move in time.

  25. Thank you Dick Clark – I appreciate it.

  26. Alessio, I do not agree with your vision that gold is on the mouth of everybody (“social media sites are already banging the drums for $5,000 gold”). You are a professional trader, of course you read a lot of financial news, so you tend to think that everybody reads that news. My impression: when I speak with “ordinary” people about gold they think I’m a caveman, unless they are Indian, in which case they take me more seriously.

  27. I think this was a massive muppet shakeout and the excuse for the bullion banks to offload their legacy shorts onto the spec herd. mission accompli.

    now GS were the largest buyer of GLD in Q2, surprise surprise πŸ˜‰

    http://www.zerohedge.com/news/2013-08-30/guess-which-bearish-bank-bought-record-amount-gld-q2

    you were correct before Alessio, but I think you might miss the boat waiting for sub $1000, because the Fed is not ever going to taper in any meaningful way without a swift retraction and reversal, they are going to increase, forever, until the markets stop them, because nothing else can or will ever stop the US spending their imaginary money.

  28. I agree with some of what you say Alessio and some of Phil B’s sentiments. Whilst the threat is to slow QE I am doubtful it will be anything other than being seen to make an effort at reduction so I expect it will continue at a slightly reduced rate for a while yet. The UK has a major debt problem that could burst its bubble and the US is threatening to get involved in yet another conflict, either of those could move markets and the chances of the stock market declining fast has not gone away. I see gold at the moment following a upward channel from the June low, there could be more of a rise within the channel before it retraces

  29. While I agree with you regarding the ‘blood on the streets’ theory. (That moment may well appear very suddenly with little or no warning.) I feel that the analysis drawn from the charts in your article is mostly based on the paper gold market. To get an accurate overall picture you need to consider a few more issues. I would be grateful if you would address these as they, in my humble opinion, may give rise to just such a moment:

    1. The CPI these days is false. Its does not reflect the true consumer price index which can be seen by going to http://www.shadowstats.com/. I am suggesting your calculation on the gold price being 3.4 times that of the CPI should be re-done using the corrected CPI.

    2. Comex gold reserves are dangerously low, which when one considers the insatiable appetite China and India seem to have for the physical metal would seem to point to the physical market squeezing the paper gold market, which is likely to cause the gold leasing market to begin to unravel.

    3. The mining cost of gold I am told is around $1,200 per troy ounce. If the mines were to shut down due to gold dipping below this level it would serve to increase the demand for physical gold ten fold, thus magnifying the problems faced by Comex and the gold leasing market. Once the market realised gold was below its mining cost and became aware of the Comex issue the market would smell blood.

    4. Greece is due for another round of bailouts with Portugal not far behind, and further instability in the Euro Zone usually pushes the price of gold up.

    5. At the moment the drums of war seem to be beating, the likely effect of which is a higher oil price, some are predicting $150 per barrel. This would add pressure to the already fragile Euro Zone which when combined with the treat of war means only one thing. People run to gold when they get scared.

    6. I think your prediction of $800 for gold may however come true at some point, but I feel it would take something catastrophic to get it there. Perhaps the Fed announcing a definitive tapering move could trigger a derivatives implosion. That said I feel the bottom for gold is probably between $1150 to $1,200, however all the facts at the moment seem to point to gold being close to surging far higher. The only reason for a pull back would be if the Fed stopping its QE programme which it cannot do without imploding the US economy, and so far this has not happened.

    I do think however we should all be wary of believing that the Fed will act in the best interest of the economy and not taper. The Fed despite it’s mandate acts in the best interest of the Fed, we may well see a nightmare collapse and $800 gold but this is not something that any person or chart can predict. Until then based on current facts I would say gold could swing backwards and forwards between $1,450 and $1,200 until a ‘blood in the streets’ moment suddenly appears when the physical market blows up the paper and gold leasing markets.

    Let me know your thoughts

    1. Establish what the average gold mining cost actually is, I believe its around $1,200 per troy ounce, when this level is reached demand for physical will squeeze the paper market which could well bring about a ‘blood in the streets’ moment.

    2. Comex gold reserves are now running dangerously low which considering the buying frenzy in China and India for gold

  30. I think we have to clearly distinguish between “paper gold” and “physical gold”, the terms that are being deliberately mixed up as part of the manipulation. The charts are perhaps valid for paper gold predictions, but are completely decoupled from physical fundamentals. Just a mere fact that the price fall spurred incredible physical demand not seen for years yet not consequently caused correction of the price confirms how deeply flawed the paper market is. While the suppression can perhaps succeed in deterring the West from further physical buying, it certainly doesn’t work for Easterners who significantly contribute to physuical demand. For them the situation is convenient as well because it’s in fact the best strategy today – dump paper and buy physical at discount prices. Of course, this is not sustainable because of many reasons already mentioned here. Physical gold investors should patiently wait until the point of no return comes to scene and we’ll then see some nice fireworks.
    I think the main problem common to many contemporary analyst lies in perception of gold being commodity and not a real money.

  31. I think we have to clearly distinguish between “paper gold” and “physical gold”, the terms that are being deliberately mixed up as part of the manipulation. The charts are perhaps valid for paper gold predictions, but are completely decoupled from physical fundamentals. Just a mere fact that the price fall spurred incredible physical demand not seen for years yet not consequently caused correction of the price confirms how deeply flawed the paper market is. While the suppression can perhaps succeed in deterring the West from further physical buying, it certainly doesn’t work for Easterners. For them the situation is convenient as well because it’s in fact the best strategy today – dump paper and buy physical at discount prices. Of course, this is not sustainable because of many reasons already mentioned here. Physical gold investors should patiently wait until the point of no return comes to scene and we’ll then see some nice fireworks.
    I think the main problem common to many contemporary analysts lies in perception of gold being commodity and not a real money. Gold cannot be commodity because of very simple reason; it’s not useful almost anywhere in industry. The very most of it is being accumulated and held in bullion vaults or jewelry safes exactly as money savings are.

  32. How does one derive an assumption for mining cost of $1,200 per oz? If this is true, how did mines stay profitable anytime before 2010?

    If mines do shut down, how does such an event stimulate increased gold demand?

    What drives gold demand? What are the utility purposes of gold? How much of the existing gold supply is used for the purpose of utility?

    Aren’t Greece bailouts and U.S. QE just debt offerings? How can that, in itself, stimulate economic expansion? Don’t interest charges add pressure on growth?

    Are rising asset prices really in our best interests? Don’t rising prices add pressure on businesses who need to buy things, to make other new things?

    Does anyone know what % of oil supplies Syria contributes to the world economy, or if it has many key routes for pipelines?

    Hope my questions get published. Last comments I submitted haven’t made it through yet.

  33. I now think we have a good chance that Gold will go down to 1359 bounce off of that and then go down to 1311. Great article on Syria by the way which although terrible is being used as a smoke screen for the real problem which is still the massive amount of debt that pumping money into the market has not resolved. QE has helped the stock market hold up even though everyone knows it is as not going to continue for ever and QE was supporting bonds but they are now wary that the threat of easing may become real soon. Everything that went into the Banks has been kept by the Banks themselves to strengthen their own balance sheets so they were the only real beneficiary of that. Interesting times, the fall is often much quicker than the rise so we could see blood on the streets and some buying opportunities soon.

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