My current take on the gold market is quite simple because the gold market is structured in a way that makes the current analysis very clear.
The chart above is the monthly gold price chart. It is very clear that the gold price has completed a valid ‘sign of strength’ breakout as shown by the tri-arrows. That sign of strength breakout was very significant in that it was also a confirmed breakout north out of a very large inverse head and shoulders bottoming formation.
But now the gold price is retracing and it is doing one of the most common occurrences you will see in any market, index or stock. And that is simply a retest of the breakout area, in this case the 1000 level. Retests to the breakout areas on low volume have the potential to be very low risk entry points for going long.
But there are a few important things I would like to see on the monthly retest of the 1000 level on the gold price.
- I prefer to see price touch the 1000 range but then bounce off of it as if it was stepping on a bed of hot coals. So we want to see a monthly bar test of the 1000 level but then a very strong intra month reversal that closes at the top of the monthly bar’s range.
- I do not want to see the gold price ‘hang around’ the 1000 level for too long a period. In addition, I definitely do not want to see it break under the 1000 level again. Perhaps it could break under 1000 for a very brief period, but it had better be quick. The reason why is that we do not want to see the gold price succumb to the magnet of sub 1000 levels.
If we see sustained breaks below the 1000 level and weekly and monthly closes below that level then I will have to conclude that the gold bull market will go into hibernation for several years. That is how critical this level is in the context of the entire chart structure in my opinion.
Breaking below 1000 would potentially set up a similar topping pattern to the one that occurred in the mid 1970’s gold bull market. There was a similar slightly higher high and then a break down back under support. It eventually led to a 50% price correction to 100 dollar gold price. A correction of that magnitude from gold’s recent all time highs of 1200 would put it at 600.
So, to be clear, I still believe that the gold price is in a strong bull market. But my condition for the maintenance of the bull market is that the gold price holds with strength the 1000 level. If it fails in that regard, then I am going to have to flip to very bearish on gold for at least a 1 to 2 year period and be open to the idea of close to 600 level on gold.