Gold is near a critical turning point – where will it go next?

As I write this on Thursday afternoon, gold is rallying strongly. Very strongly. It's up about 2% on the day.

Has it come back from the brink, I ask myself?

Gold is nearing a crucial level

'The brink' is one of those phrases that keeps getting bandied about by journos who want to make their copy more exciting. I'm never quite sure what it means.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Greece is on the brink, they tell us. Europe is on the brink. In fact, since the global financial crisis began back in the halcyon days of 2007, rather a lot of companies and countries have been 'on the brink'. Iceland even went over it.

But do you know what? After Iceland went over said brink, life carried on. In fact, as far as the Icelandic economy is concerned, it got rather better. Its GDP growth estimated at 2.6 % this year outshines even Sweden's.

I rather wish all those other countries, governments and institutions with unpayable debts would just get on with it and go over the brink. Then we could purge, move on and get this financial crisis over with.

All these policies and loans and bail-out funds to pull whoever or whatever back from the brink do is delay the inevitable. Meanwhile, innocent bystanders get caught in the crossfire of volatility. And the rest of us feel like we're waiting in some kind of purgatorial pending tray.

Gold, however, was this week on the brink. On the brink of what? Well, on the brink of... going lower.

I have drawn a red line on the chart below at $1,525 an ounce. That red line is your brink. Gold has tested that line three times now. It has so far proved support. I see it as a big, big level. Without wishing to sound puerile, I really hope it holds.

(Click on the chart for a larger version)

Gold is in a downtrend now. It's been in a downtrend since last September. It edged lower in March and April, but that downtrend suddenly accelerated in May and now the moving averages are all sloping down. I'm hoping this week was the final capitulation, but I can't be sure.

Why the $1,525 level matters

We have to accept something. And that is that during the early stages of a financial panic, despite the fact that you might intuitively expect gold to perform well, it doesn't. 2008 proved that.

And now we see it again. Government bonds are - for now - the perceived safe haven. I have no idea how long this will last. Given that most governments are wallowing in unpayable debt, it seems odd that their issuance should be a safe haven, but that is where institutions and fund managers and investors park their money - not gold. How ironic that our own government bonds should be called 'gilts'.

Coming back to that $1,525 level in gold. Why am I so keen for it to hold?

This next chart shows gold since 2000. The blue line is the 252-day moving average. There are around 252 trading days in a year, so effectively that blue line is the average price for the past year. Since 2001, gold has only gone through that blue line and stayed there for a significant period of time once. That was in 2008.

The problem is, these last few weeks it's done it again. It's sunk beneath.

(Click on the chart for a larger version)

I don't know about you, but I don't fancy another 2008. 2008 was when grey hairs first made themselves conspicuous about my person. (It may have simply been age, but I'm sticking with 2008 as the cause).

That's why I'm so keen for that red line to hold. If it doesn't I expect the next stop on the way down to be just above $1,400. After that we're looking at the $1,250 area, where, even in the worst-case scenario, I would hope for us to find a bottom. You can see why I am so keen for this $1,525 area to hold.

While it does so, my theory - that gold is in consolidation mode after its run up to $1,920 last September - still holds. If it doesn't, I think we're looking at something more serious - not just for gold , but across the board.

And now for the good news

Here's something positive to take away from this. I have been looking at the duration of bear and consolidation phases in gold since this bull market began.

(Click on the chart for a larger version)

The red line marks the top of gold's channel. The blue dotted lines mark the consolidation periods from interim high to breakout to new high. The green dotted lines mark the period from the interim high to the low from which it sets off on its next run.

The longest duration from high to low was in 2008. It lasted nine months. This bear phase has been about eight months. So we're in the timeframe for a low. Here's hoping.

Finally, ladies and gents, I've really enjoyed writing this column, but I'm going to take a little sabbatical over the summer to recharge my batteries and get re-inspired. I've been working on a book - and I want to get that finished too. I'll see you in September.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

Our recommended articles for today

A UK company revolutionising drug discovery

Network pharmacology - finding alternate uses for existing drugs - is a growing area of medical research. Tom Bulford looks at one small-cap pharma that could be on the brink of an exciting discovery.

Are stocks really a better bet than bonds?

The conventional market wisdom is that stocks always outperform other investments. But with today's increased risk, that may no longer be true. So are stocks really only for mugs? Tim Bennett investigates.