I like gold. But there’s a time to buy and a time to sell.
Last week, I showed you the first part of my analysis of why gold is going to US$931 dollars per ounce next year. If you didn’t get to see it, you can view it here. This week, I’m going to back up my claim with more analysis and another chart.
One reason gold will fall is due to the bullish stock market run. Despite the mainstream media calling the stock market a ‘bubble’, this rally doesn’t look anywhere near the top…far too many people remain bearish and interest rates are still too low.
There is a clear thirst for yield out there, pushing more and more people into the stock market. This should result in the stock market hitting new highs next year.
This chase for yield will likely mean a sell-off in gold. After all, gold doesn’t offer any yield. At US$931, gold will be trading at a ‘fire sale’ price and the mainstream media will no doubt go crazy. Especially when the stock market is hitting new all-time highs.
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50% corrections are typical in any financial market. It happened in the US housing market during the 2008/09 financial meltdown. The stock market felt similar pain. In fact gold fell 50% between 1974-1976. This sort of price action isn’t unusual.
After falling from US$1,920 per ounce at the end of 2011, US$931 would represent roughly the 50% correction level. In this case, US$931 would be a great buying opportunity.
The chart below shows you the long term gold price. Each bar represents one month. Compared to last week’s logarithmic chart, this normal chart shows the real-time closing prices of gold. Therefore, it’s a lot more volatile than the logarithmic chart, which smooths out the volatility.
You’ll notice that last week’s long term smooth uptrend no longer exists on the normal chart. In this case, the best way to explain this story is using Fibonacci sequence lines (dotted lines). I’ve fitted the lines using the long term top (US$1,920) and bottom (US$250) prices.
Every Fibonacci sequence level has acted as support and resistance in the past. These levels should come into play in the future.
Importantly, my target gold price of US$931 per ounce aligns with the significant long term 61.8% Fibonacci level (US$900). Shown by the red line, this level is psychologically important for traders. Interestingly, technically the logarithmic and normal charts line up. This signals that there’s a good chance gold will fall to US$931 per ounce.
For example, the 23.6% Fibonacci level (US$1,530) on the above chart aligns with the major resistance level of US$1,553 per ounce on the logarithmic chart. This is a very important level for gold. And it fell through this support zone at the start of 2013 to its recent low of US$1,180.
If gold corrects to US$931 per ounce, it will likely bounce off the long term bullish trend-line which existed between 2002 and 2006. This will prove to be more support for the gold price. US$931 per ounce was also a major support and resistance area for gold between 2008 and 2010, before it broke out to all-time highs.
Heading into 2015, the gold price is likely to be volatile — there will be both up and down days. Stay focused, because overall the next short term play is down. And the next phase of the gold bull market will begin when gold technically bounces of the US$931 per ounce level next year.
Jason Stevenson+
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