The Gold Report |
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| TrOtOaRkA | How Low Can You Go? Enrico Orlandini 15 June, 2006 written 14 Jun What a difference a month makes! On May 9th the gold spot price hit 730.00 and yet by today, June 14th, we've come all the way back down to 565.00. Last month the gold bugs were the talk of Wall Street and today they couldn't buy a friend with a fist full of Krugerrands. I must say, the Wall Street crowd is certainly a fickle bunch. The average investor in gold is under considerable stress at the moment and most are reduced to "hoping" as the carnage in the gold pits reaches a crescendo. Certainty and joy have left the building while hope and despair have taken their place. Hope has been responsible for turning more dollars into cents than just about any other factor that comes to mind. It has been the ruin of many investors. All but the most sophisticated investors have spent the last two or three days dumping their positions in gold and gold stocks and you could literally see the panic on the computer screen yesterday as the price of the yellow metal plummeted $44.50. To make matters worse, it was down another $10.00 on the Globex late last night. The e-mails I receive serve as a pain gauge so to speak and yesterday it went off the charts. One e-mail in particular summed it all up: I was informed that Richard Russell, a long time gold bull, had written an article declaring that gold was in a bear market now and would be declining for a year or so. That caught my attention because I had just read a short piece written by Mr. Russell on Saturday and was surprised to hear that he had come out with another article on gold in such a short period of time. I searched the internet but to no avail, and it finally dawned on me that the client was referring to the same article I read over the weekend. I went back over the article just to refresh my memory and the word bear was nowhere to be seen. Mr. Russell did state that he felt it would be a matter of months before we bottomed and consolidated that bottom. I disagree, but more on that latter. I would also like to remind readers that Mr. Russell, along with just about everyone else, felt gold had topped at 644.00. The actual top was 739.20 in the August gold futures contract. So what does one do when things get confusing? Well, the first thing I do is try to slow things down. The hustle and bustle of everyday activity tends to distort one's vision and thinking. I slow things down by a shift in emphasis from daily charts to monthly charts and below you have our old friend, the Monthly Chart for gold: [click to enlarge chart] Please note how gold spiked up and above the upper band of the trend as it exceeded the $730.00 price in early May. The last week's price action is not included here, but if it were, you would see that the uptrend in gold that began back in 2001 is still intact. In fact, it isn't even close to being under any duress. There is only one conclusion to draw from this chart and the present price action in gold: the bull market in gold is alive and doing quite well! Now with the above chart firmly in mind, let's see if we can make some sense out of the shorter term movements and restore some semblance of sanity to our lives. Let's take a look at the Weekly Chart of gold below and you'll see that all gold has done is return to the range we broke out from. No more and no less! Although it seems like decades ago, you may recall that gold spent months consolidating gains before we began this latest move up. We traded in a range (535.00 to 575.00 for what seemed like an eternity. There is nothing unusual about a commodity or index returning to the range after an initial breakout. Try to remember that we are discussing gold and it is just beginning the second phase of what will be a three (and maybe four) phase bull market lasting no less than another four years and it could very well stretch into the middle of the next decade. When seen in that context, yesterday's $44.50 decline really doesn't mean much, if anything at all. There are two areas of support: one is obvious from the chart and one isn't. The obvious support is the 50-week moving average at 526.52 and its held up nicely for several years. The not-so-obvious support is at 553.24 bases the August gold futures contract and is my bet for a bottom. This would be a 25% correction and was my original estimate for a correction once a top was in. Assuming that 553.24 holds up on a closing basis, I would then expect a one to three month consolidation period where price fluctuates between 550.00 on the low side to 575.00 on the high side. After that, we should be off to the races again with resistance at $569.70 and $644.70 in the spot price. Then we'll see another test of 728.60, probably by the end of the year: Finally, I would like to make one additional comment with respect to gold and the bottom I see here. I have followed gold for twenty-five years and I have never seen bearishness like I see now. If there was a gauge for bearishness, we would be off the charts. That's usually the best indicator for a bottom that you can find and that is why I bought gold last night and again this morning. I would like to close now with a few words on silver and gold stocks. With respect to the former, silver will bottom when gold does and not one minute before. Once we know gold has bottomed and consolidated silver may follow or it may lead as it did before. We'll just have to wait and see. Gold stocks are another and extremely complicated issue. Let's take a look at a Weekly Chart for the HUI below: Under normal circumstances, I would tell you that the HUI bottomed and will bounce off the 50-week moving average, but we are not living in normal times. The HUI is suffering from a double whammy of declining gold prices as well as a declining DJIA. As most clients are aware, I feel the DJIA has topped and we are about to begin a vicious decline. That decline will depress gold shares even if gold rallies from here and that effect could last for up to six months. Maybe even a bit longer. With that in mind, each investor must decide how much pain he is willing to endure. As most of you already know, I will sit tight. -Enrico Orlandini For those of you interested in receiving information on the Gold Fund we manage, please feel free to e-mail us at [email protected] and we will respond as soon as possible. email: [email protected] website: www.dowtheoryanalysis.com Orlandini Archives |
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