How low will gold go?

Gold and silver have both entered a correction phase.

Gold began 2011 at around $1,420 an ounce. By the end of last week, it was more than 3% lower at $1,370. Silver, meanwhile, toasted the New Year at around $31 an ounce. Celebrations were due – it had risen some 80% in 2010 – but the hangover quickly set in. A week later it was down more than 5% at around $28.60.

Meanwhile, at $34, Silver Wheaton – one of the leading silver stocks – is now down over 20% from its early December high of $42. That’s quite a wallop.

But gold and silver have had a stellar 12 months. This correction is overdue. And it’s one that I welcome. Nothing goes up in a straight line and all that. Ultimately, it will add to the longevity of this bull market.

How low will gold go?

The fundamental argument for gold has not changed. The world over, we still have inflation, deflation, negative real rates of interest, unpayable debts at most levels of society, unsustainable deficits, out-of-control government spending, misguided monetary policy leading to mal-investment, excessive speculation and bubbles – I could go on.

There are many drivers to this bull market in gold, and none have gone away. Nevertheless, corrections are inevitable. We have one now. The question is: ‘How low will it go?’

I’d like to try and answer that as I feel I’ve made a bit of a discovery: the 144-day moving average. It doesn’t sound that exciting, but it’s amazing how well it has been working over the last two years.

There are 252 trading days in a year. Prior to the crash of 2008, once or twice a year, gold would return to its 252-day moving average (the average price of gold over the previous 252 days). It would flirt with it for a while, before making its next move up.

Here is a chart of gold from 2001 to 2008, which demonstrates this:

Gold price from 2001 to 2008

Charts courtesy of
Stockcharts

However, since rebounding off the crash of 2008, it has not gone back to this line once. Rather, the 144-day moving average (blue line on the chart below) has been the line to which gold has returned. It seems to go there two or three times a year.

Gold price - 144-day moving average

That 144-day moving average currently lies at around $1,300 an ounce and rising. I suspect we will get to it on this correction. If we follow the time scale of previous corrections, then we should reach the low towards the end of January.

If gold bursts down through that line with volume, then we are in for something a bit more serious than a normal, ongoing bull-market correction. But I am fairly confident it will hold, barring some sort of global liquidity panic.

For those of you who want to follow gold against this moving average, here is a chart that will track progress.

If gold does get to this line, one low-risk trade might be to buy gold at the moving average with a stop just below.

I should say that when gold corrects, you usually see one wave of selling. This is followed by a bounce, which is then followed by a second wave of selling, at the bottom of which you see the low.

We have had the first wave of selling and, as I write this, we now seem to be enjoying the bounce. So it’s likely that that second wave of selling is just around the corner.

The three phases of bull markets

It is said that a major bull market has three phases. The first phase is the stealth phase, where only the ‘smart money’ gets onboard. This is followed by a correction. The second phase, typically the longest, is known as the ‘wall of worry’ phase. This is when more and more institutions start to come onboard, the sector receives more and more media coverage, but there is still a great deal of incredulity and denial. People think they are too late to invest.

Finally, we have the euphoria – the mania phase – where the proverbial shoe shine boy starts giving you advice.

If you look at stock markets, you saw this stealth phase between 1980 and 1987, before we got the crash. From 1987 to the Asian crisis of 1998 we enjoyed phase two, the ‘wall of worry’ phase. Then from 1999 to 2000 came the insanity.

This is a fairly arbitrary cycle of course. But I would argue that we are somewhere in phase two in this gold bull market. I am still amazed at how few people actually own gold. Phase one, the stealth phase, was between 2001 and 2008 and ended with that bone-shaking meltdown.

Gold consistently found support during phase-one pullbacks at its one-year or 252-day moving average. With the acceleration that you often see in part two, perhaps the 144-day moving average will define this second ‘wall of worry’ phase, consistently marking support. We shall see.

The 252-day moving average still works for gold stocks

For gold stocks, however, the 252-day moving average has been dependable. It was a fairly reliable guide to rough entry points into the sector from 2001 to 2008, but here we see what a remarkable marker it has been since 2009. This a chart of GDX, the exchange-traded fund (ETF) for the major gold stocks:

GDX, the exchange-traded fund (ETF) for the major gold stocks

It’s amazing to see how it ‘kissed’ the average in early August 2010, before its stellar run since. Just as I am looking for gold to head back to about $1,300 and its 144-day moving average, I am looking for GDX to head back to the $51-52 area, another 10% or so from here.

For those who want to track the chart, here is a live link.

By the way, it’s worth noting how gold made three attempts to break through the $1,425 mark and failed. But as gold was making its third attempt, the gold stocks were putting in a much lower high. That is your ‘bearish divergence’. Gold’s move was not confirmed by the stocks, which were weaker. The stocks did not ‘believe’ the move. That is often a sign of trouble ahead.

It’s also worth noting that since its first November high, gold has lagged the broader US indices, which have gone on to post higher highs. Like gold, however, emerging market indices also lagged.

As I have noted before, we have been in an ‘all-one-market’ environment, where all asset classes rise as the US dollar falls and vice versa. But if, as we’re seeing now, not all markets are rising together anymore, then we have something to think about. Just as gold’s high was unconfirmed by the gold stocks, the S&P 500′s recent high has been unconfirmed by other global indices. That could portend trouble ahead for the US market.

Nevertheless, I am looking for a turbulent month which should see a move for gold back to its 144-day moving average, where I am guessing it might find support. That – hopefully – will mark yet another entry-point into this wonderful bull market.

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46 Responses

  1. 12/01/2011, SteveH wrote

    I thought GDX was meant to leverage the gold price. The idea being that the cost of mining is more or less fixed per kilogramme, so the profit (sale – cost of production) exaggerates the price movement (up or down).

    According to digitallook the price of gold (PHAU) is up 60+% since Jan 08, but GDX is only up 20+%. Can anyone explain please?

  2. 12/01/2011, CG wrote

    Are there similar charts and analysis for silver?

    Thanks

  3. 12/01/2011, John Carr wrote

    Having just commenced subscription to Money Weekly, I am already confused by what appears to be contradictory articles from the same publication
    I was drawn to the publication by an article which appeared a couple of weeks ago ‘ 4 Toxic Investments to avoid’

    Following on in the article, were suggested areas to consider for investingin for the forthcoming year.

    Headline ‘GOLD WILL DOUBLE IN PRICE THIS YEAR’ estimated $2340 by end of year.

    This article seems to indicate that this is not the case, can anyone verify either article to allow me to make choices for investment?

  4. 12/01/2011, PeteN wrote

    RE How low will Gold go ? article byDominic Jan 12/2011

    Thanks to MoneyWeek, Bill Bonner and Dominic Frisby I bought all the gold stocks I could back in 2006 when gold was trading at $600.

    This latest piece from Dominic is yet another example of his excelent work and brilliant insight.

    Thanks very much and kind regards
    A very happy subscriber.
    Mallorca
    Spain.

  5. 12/01/2011, Derek wrote

    I agree with John Carr, mixed messages abound. This newly discovered 144 day average sounds like someone discovering a betting system based upon the past..invariably they don’t work. Always been pleased with Dominics blogs..but not so sure about this one..though I would not bet against it!!

  6. 12/01/2011, Alex wrote

    Dominic,
    Thanks for the comments. However you have not been right yet with any of your short term predictions regarding corrections and temp highs in the last couple of years. The fact of the matter is that it is entirely a guessing game and the proverbial shoe shine boy could do your job as good as anyone.
    The only right thing you have said is that gold will continue, for the time being to go up. There will be ups and downs but nobody can predict that. So why bother?

  7. 12/01/2011, ladyboy21 wrote

    nice one dom good reed mate

    guy above no one knows if they did they would be very rich
    all you can do is reed up and gofore for it.

  8. 12/01/2011, PC wrote

    @John: recommendations are the difference between the long-term fundamentals approach and short-term chart analysis. Both have their merits but if you follow the latter there is too little daily information for the ill informed to react quick enough. The volatility is also fairly alarming unless you get practised and used to it. Maybe hold off for a month to see if Dominic is correct.

  9. 12/01/2011, SH wrote

    I think Dominic is looking on a shorter time frame gold correction, already underway and taking place in the next few weeks. That gold doubling prediction is based of “this year” implying by end Dec ’11. Either way keep reading as much as you can enabling you to make an informed investment decision. And remember caveat emptor! Good luck

  10. 12/01/2011, nvp wrote

    be careful

    finding Magical Ma’s that backfit a charts performance is a dangerous game

    NVP

  11. 12/01/2011, Atchman wrote

    Hi John,

    Beware the advertisers! Even Moneyweek need to sensationalize the headlines in order to sell stories. Having said that they are one of the better publications out there. Nobody can predict the future, anyone who tells you that is lying. All we can do is look at the empirical evidence and use what we already know (and more importantly what we dont know) to make good judgement calls about probabilties. :)

  12. 12/01/2011, PC wrote

    Dominic; whilst I follow and respect your experience and viewpoint, I am concerned that your chart examples are selective to make your point. I have been fiddling around with dates and moving averages on those charts and can create whatever story I want, but its hard to be consistent over all time periods.
    Gold might need the input of significant bad economic news before continuing its rise. Whilst silver may react in parallel due its historic status as a currency, but also might react independently due its commodity utility, the long term gold/silver ratio being out of balance and (alleged) market manipulation.

  13. 12/01/2011, Krystyna wrote

    A very imformative article which makes a decision to buy or sell much easier. Thank you.

  14. 12/01/2011, Roger wrote

    I see value in this article. Thank you Dominic.

  15. 12/01/2011, John M wrote

    Dominic
    I think you are ignoring the increasing evidence of divergence between the physical bullion markets and the paper markets. Paper markets are much larger and normally determine prices. However it took Sprott months to acquire the silver it needed for a new ETF and Perth Mint now say they cannot get gold supplies to meet demand; even BullionVault.com had a liquidity warning last weekend due to late silver supplies. If physical shortages continue then the dam will burst and who knows how high the prices will go.

  16. 12/01/2011, James wrote

    I like chart analysis. For the most part it might be mumbo jumbo but it has the advantage that it is visual. The market being the sum total of all the knowledge available is not visible except as a single point of price. Anyone sticking their head up to analyse gold price in these turbulent times and presenting a logical visual argument gets my vote. I am all for selling gold down to 1300 with a close fitting stop in case of a rebound.

  17. 12/01/2011, Alex wrote

    I must say I’ve always felt that charts are for idiots as they have no relation to reality or fundamentals, of course given that most people working in the markets are idots this means charts are widely followed as very few people can be bothered to actually understand the commodity they are trading, which of course makes charts a very good guide to how the markets will act. Whereupon lies the value of charts.

  18. 12/01/2011, cooldude wrote

    Interesting article as usual Dom. Like John M not overly convinced about this 144 day moving average. Massive physical demand from China (the Bejing put) and India as soon as the price drops below $1400 is creating record premiums for 1 kilo bars. Shortages in Aus as well so I dont think we will hit this 144 day average. Time will tell but it could just as easily blast back above $1400 with all the demand. Lack of faith in major currencies will keep this demand up. Hope you are following Kefi Minerals Dom. On fire. Another Frisby firecracker!!

  19. 12/01/2011, SH wrote

    @Alex trending markets and mean reversion are 2 of the most powerful weapons in an investor’s armoury. They certainly pre-date chart analysis. However these are best shown on a chart and thus people analyse charts to take advantage. I feel sorry for investors who only make decision based solely on either technical (charts) or fundamental analysis. Mr Market is a tough opponent at all times, no need fighting with one hand tied behind your back!

  20. 12/01/2011, K wrote

    Dominic,

    I am puzzled that the two “moving average” lines displayed show no price data below the average – so are the averages actually for the data displayed and how are these “averages” calculated? What have I missed?

    K

  21. 12/01/2011, Screwloose wrote

    Dominic’s calls are usually pretty good – and he won’t be too far wrong this time.

    The momentum funds have twigged gold’s seasonality and pile in for the autumn season with their huge, leveraged, firepower. They drive gold to new heights and then depart en-masse for their year-end book-squaring on the first dip in December.

    Gold then consolidates it’s significant new gains for a little while – so it could well get near its uptrending averages as it chops sideways for a few weeks.

    Look for the low around the 26th – probably 1500 GMT – then it’s back into climbing mode until the summer break starts around May-June. The mo-mo boys then reappear in August….

  22. 12/01/2011, Rocket wrote

    Dominic,

    we have done very well with your Gold & Gold stock predictions so far. Thank you very much!

    I believe in the long term bull market for Gold but there are quite a few potential black Swans in the pond…very diffcult to make short term predictions…but your views are always an excellent benchmark.

  23. 12/01/2011, Ben Bernanke wrote

    Gold is in a BUBBLE! Just like oil popping at $147/barrel and falling to under $30/barrel in mid 2008. Some 80% decline!

    Can you withstand such a similar crash with gold? That would mean a fall from $1400, to $280/Toz! Sure oil has recovered, but no deadbeat “investor” can withstand that volatility. Commodities are therefore very risky if you can’t ride out these shocks. Stick with fiat and sleep well.

    Kind regards Ben.

  24. 12/01/2011, Rolex55 wrote

    Keep your comments coming Dom…..
    Gold and Silver both going North…Time is on our side
    Cheers….

  25. 12/01/2011, Malcolm wrote

    Hi Dominic

    As a longterm subscriber to moneyweek I’ve followed your articles on gold for several years & would like to thank & congratulate you on their interest & accuracy.

    I bought bullion at $800 a couple of years back & sold a 1/3rd of my holding when you sent an alarm email approx a year ago about an imminent pull back which never actually materialised. Never mind! I think you correctly predicted that gold would be $1400 at eof 2010.

    You must have made a bit from gold because about a year ago according to your picture, did you not have a haircut & shave to smarten up your image?

    Keep up the good work & thanks again.

    Malcolm

  26. 12/01/2011, Jason Bourne wrote

    I’ve read all your comments and come to this conclusion. Unless your playing with someone else’s money stick to what’s important for those of us who still have to pay for a mortgaged home; pay off your property before trying to get rich on the stockmarket or by storing commodities!

  27. 13/01/2011, bbb wrote

    I predict gold will go up and then down tomm. from 9:30am to 4 pm and it will end either higher or lower! i bet im right!

  28. 14/01/2011, Alan Jeavons wrote

    Friday 14 Jan 17.30

    Acting on your advice, yesterday I closed all my long gold spread bets.

    Hail Dominic, King of Gold!

  29. 14/01/2011, Romsey Dave wrote

    @ K

    The averages are delayed from the raw data by…er….. 144 and 225 days each. You need 144 days of price data to calculate the first 144-day average. Then you add the next day’s data point – removing the first day’s – for the next 144-day average result, and so on. In a falling market the long term averages will appear above the daily prices as they have this ‘old’ data in them.

    All clear??

  30. 14/01/2011, Steve wrote

    Dominic,
    Good call! Realised I was over leveraged in a potentially falling market and closed most long gold and silver the day before yesterday. Will re-open when prices are a bit lower. MoneyWeek subscription has more than paid for itself.

    S

  31. 15/01/2011, Dick wrote

    If the level of Gold ETFs represent 9 years future production, then we should be due for a serious correction! If this degree of speculation abates we will have a far less volatile market.

  32. 15/01/2011, jj wrote

    Last time I looked every country in the world was using a fiat currency system.The U.S. Dollar has declined over 98% since the establishment of the Fed in 1913.I don’t see any changes that would cause these fiat currencies to stop declining.Only the rate of decline changes.Even China,who is the equivalent of what the U.S. and Britain were in the past doesn’t have an honest currency .China is rapidly increasing it’s supply of currency and suffering high inflation.So,until these countries decide to adopt honest money as their currency we can expect currency devaluation to continue.

  33. 16/01/2011, K . J wrote

    currencies in the old world are all down 30%+, gold has had its run now, so now gold is in a big BUBBLE and growing fat, its in the sheep stage now, when the big boys start getting out gold will go south like a light so look out its like all the bubbles before we had.

  34. 17/01/2011, Akhil Khanna wrote

    One thing I fail to understand is that why most analysts are recommending the purchase of Gold as a safe investment? The problem today is that the price of Gold is not derived by it’s physical demand or supply but more by the speculative positions standing long or short on the commodity exchange like any other traded commodity, stock or currency.
    The basic mechanism of price discovery (based on demand and supply for actual use) of anything traded on an exchange has been terminally infected by speculators having access to unlimited funds and super fast computers for trading leading to volatile price swings. This has been made worse by the launch of ETFs for anything and everything under the sun by the financial community.
    The price of everything including Gold is likely to suffer when the speculators unwind their positions due to some event that they have not anticipated or foreseen.

    http://www.marketoracle.co.uk/Article24581.html

  35. 17/01/2011, Technical Analysis wrote

    Lads, I am looking for a fall in gold to 1176., 90, where to place a tasty buy with max stop loss of 100 points….Should be good to go up from there on further to 1500′s / 1600′s.

    M

  36. 18/01/2011, ken sutton wrote

    Re:Akhil Khanna

    Physical Gold investment without leverage is safe ( although you shouldn’t think of it as an investment its a store of value).
    Barring theft gold is gold. It is any change from having your wealth in physical form that is investment or speculation. That includes cashing your bars and putting the money in the bank.

    More complicated than that but a simple summary of my views

  37. 21/01/2011, Funkid wrote

    I like gold and always have, also Natural Resources for investment. I am not a professional but have taken control of my pension and ISA funds having had them lost in the past by financial experts. In 2006 I spent £435 on gold as I didn’t have much money and £7000 on Natural Resources in 2005 – adding modestly on downs, I have now grown my gold to £10,000 and £16,000 in Natural Resources – growth of several hundred percent – not too bad for a novice. I also smile when I fill my car with petrol because if it is going up, so is my pension fund. So what it it drops 10 or 20%, I am still quids in and although inexperienced, I believe that resources are finite so I will continue to build my funds. I love Money Week and like the fact there are contradictory views – just makes you think through all the arguments and investing is not so hard if you do your research and read a lot about world events, and no advisor fees – I’ll keep going as my returns far exceed many professionals.

  38. 21/01/2011, xyz wrote

    Well done funkid, you’ve hit the nail on the head. It’s the investment “pro’s” who’ll destroy your wealth with their rapacious charges. As the potential client asked the Wall Street broker as they walked around the harbour and the broker pointed out the partners’ yachts..”where are the clients yachts?”

  39. 23/01/2011, DWC wrote

    I note that the Russell Global Gold Fund ETF (AUCO) shows an identical chart over all periods compared to US based Market Vectors ETF (GDX) featured above.
    AUCO is available from ETF Securities (UK) and readily (cheaply) available on-line from UK brokers.
    Is there any downside to trading AUCO in place of GDX ?

    DWC

  40. 24/01/2011, mike wrote

    If you look at history, January and February are usually always a down market for metals. After the first two months, it should go back up because of large demands from China and India. Hang low for another month and then go after it. Good luck!

  41. 28/01/2011, RS wrote

    So far so good. Feb11 hit 1,308 overnight and moved up. The first try of the 144-SMA is fine. What’s next?

  42. 09/02/2011, bustard wrote

    Re-comment n0.3– I understand your confusion, you have hit the problem I think ‘Moneyweek’ suffers from. Firstly i think they give sensationlist headlines which appeal to investors fear and greed instead of giving a steady line on things. They also push you subscriber vehicles which in my view and experience are extremely poor. They give many punts and predictions, there broad themes aften come right but there timing is normally way out. I would only follow one of there thems one it is confirmed in the charts.
    Moneyweek would only get my subscription back if they stopped the sensationalist headlines and drop most of the ‘ get rich quick’ schemes[seemingly so to me] they try to sell you.

  43. 11/02/2011, Derek Wildman wrote

    I like to apply combinations of moving averages.I usually use the 9 day,20 day and 50 day moving averages.
    You have looked for a line of support.You have related the 252 and 144 day moving averages to this line of support???
    Can you do this a lot with gold and commodities.This is a strong indicator for the US fed.When the gold price is high relative to a line of support moving average,they should be tightening monetary policy.They should try to get the price of gold falling relative to line of support moving averages.

  44. 13/09/2011, InvestinginGold wrote

    Update in September 2011: Looks like gold may be entering another short-term corrective phase. However, I expect this will be short-lived. With the amount of panic flying around Europe and the US at the moment, gold’s safe-haven status should prevail.

    My only concern for the gold price is if there is a massive flight to the US dollar if all out chaos breaks out.

    I encourage you to check out my site at http://www.investingingoldtoday.com.

  45. 13/09/2011, InvestinginGold wrote

    Gold may now enter a short-term correction, but should then resume its upward path for the rest of 2011. Watch for a more severe correction in Q1 2012.

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