Is the Gold Bull Dead?

As 2011 draws to a close it has become quite vogue to proclaim the end of the gold bull market and predict that gold will fall below $1300 at some point in the new year. Fair enough, gold has had a truly remarkable run over the past decade so it seems quite reasonable to expect some consolidation and perhaps even a down year for the yellow metal after 11 consecutive years of gains.

As is customary for the commodities markets, sentiment has turned on a dime among market participants – It seems like just yesterday that CNBC “Fast Money” traders were unanimously recommending being “long of gold” (even those who hated it for the last 1000+ points of the rally) and the consensus view was that the “miners were too cheap with limited downside”. Now that we’ve had a strong shakeout in gold/gold miners, and sentiment is far from bullish, maybe it is time to position for a January rally in the metals space – Let’s take a look at gold over three different time frames:

 

Yesterday was the second time in the past three months that gold dipped below 1560 and it has since rallied impressively back above $1570 (as I write this 6am 12/30/2011). Should yesterday’s hammer candle be confirmed today, there may be talk of a double bottom having been put in place yesterday.

 

The double top above $1920 still looms large, as does the failed break above the symmetrical triangle from several weeks ago – However, the trend is still from the bottom left to the upper right of the chart and a close above 1583 today would print a hammer candle on the weekly chart and keep the streak of weekly closes above the 50-week SMA intact.

 

It is interesting to note that the 20-month EMA currently comes in at around $1480 which is the lower end of the 1480 – 1560 support/resistance range.

$GDX (Gold Miners ETF) gapped below support yesterday and caused many to proclaim that a breakdown was in progress – In customary fashion GDX rallied back above $51 by the close to print a solid white bullish candle on the session. The situation is similar to early October, although not quite as oversold, after which GDX rallied ~15%. It would not be unreasonable to expect a rally up to the 53-54 area over the coming days.

However, on a weekly time frame the megaphone pattern being formed by GDX should cause some concern for the bulls:

 

To summarize, over the near term the chances are good that we will see a bounce back for both gold ($GC_F $GLD) and the miners ($GDX) – However, I anticipate 2012 to be a year of volatile consolidation for both gold and the miners in which it will be important to take a contrarian stance and fade the crowd at extremes.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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