Gold is correcting, as forecast

Gold is following John C Burford's roadmap nicely. Here, he takes a look at where it might go from here.

In my previous article on gold on 9 March, I laid out my case that gold was very probably due a pullback from the stunning two-month $200 rally off the December lows.

I based my case on the reading of my headline indicator (HI) as well as the wave structure. This is what I wrote: "Today, with every shoeshine boy and his dog now tipping gold, my question is this: is gold due an imminent pull-back? And if so, how low is it likely to go?

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

"In other words, have too many bulls jumped over to one side of the boat leaving it in danger of capsizing?"

Since I wrote those words, I have noted a sharp increase in forecasts from the pundits for gold to reach levels way above the old $1,920 high. In fact, I did see targets mentioned at $2,500 and even $3,000 levels. That really sent my HI needle hard to the right.

Advertisement - Article continues below

This was the chart I showed back then:


The rally off the December $1,050 lows has several significant features. The main part of the rally is a third (red) wave, which contains its own complete five up (purple) with a textbook negative momentum divergence at the wave 5 high at the $1,280 level.

The clear implication was that if there were to be no more subdivisions higher, the market would start a decline in red wave 4 to correct the extreme bullish enthusiasm that had built up.

To put this into the bigger picture, here is the chart I showed of the decline off the 2011 all-time highs at $1,920:


My blue tramlines are OK, but not textbook. That is why I have them only pencilled in at present. But with the market having hit the $1,280 level which lies at the upper tramline and if the market has indeed started a correction, my belief in these tramlines as lines of support (lower) and resistance (upper) will be boosted.

That is my roadmap a decline and then a push higher to overcome the resistance at the $1,280 level in a very large B wave.

Advertisement - Article continues below

But in the shorter term, how is my forecast panning out? Here is the latest hourly chart:


My wave 5 of three just poked above the $1,280 level on 11 March and then declined in wave A. Following the US Federal Reserve's decision to go soft on interest rate rises last Wednesday, the market rallied to the wave B high, which did not reach the previous high.

This morning, it is falling again in my wave C. The market is following my roadmap very accurately.

On 9 March, I made a bold forecast that the market had a chance to decline to the $1,200 area. With gold trading around the $1,270 level, that must have seemed very unlikely to most.

As I pointed out, at the December lows the hedge funds were massively short, and their short covering in January and February helped propel the two-month $200 rally. So how have they behaved since I last wrote? Here is the latest Commitments of Traders (COT) data as of last Tuesday:

Non-commercialCommercialTotalNon-reportable positions
Contracts of 100 Troy ouncesOpen interest: 761,367
Changes from 8/3/16 (Change in open interest: -26,773)
Percent of open interest for each category of traders
Number of traders in each category (Total traders: 401)

They remain solidly bullish with a ratio of 4.2 to 1 bulls to bears. That is still tilting the vessel hard to one side, and I expect more movement to right the ship before the correction is over.

Advertisement - Article continues below

Nevertheless, the market is heading towards my target of $1,200 (give or take). As I have mentioned before, gold is a very spiky market and it would not surprise me to see a final spike low (to somewhere below the $1,200 level?) before the bull run can resume.

That low may well be accompanied by very bearish headlines such as "RIP gold bulls gold plunges below $1,200". And that is when my HI will really perk up.




Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019

All the gold in China: money and power goes east

China has far more gold than official figures suggest – as much as America, in fact. He who owns the gold makes the rules, says Dominic Frisby.
15 Nov 2019

Most Popular


Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020

Money Minute Monday 10 February: lacklustre growth in the UK and Europe

Today's Money Minute looks ahead to the week's GDP growth estimates for the UK and the eurozone, plus inflation figures for the USA.
10 Feb 2020

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019