Fool’s gold? Not quite. Gold (COMEX:GCJ14) had one heck of a run that technically started with a major bottom in 1999 but didn’t really get serious with the move until late 2005. Consequently gold has become a very emotional market for many and the darling of investors. If you question the up trend in any manner to many, it is like you offended their first born.
Consequently, the one demon that is very hard to deal with in any market, emotion and/or personal opinion takes the place of logic with gold and what the market is doing. All markets go up and all markets go down. It does not mean the end of that market by all means. It is merely a phase and it is the phases that we have to face sooner or later because they can be very extensive and expensive if you’re on the wrong side.
So it seems everyone is asking someone what they think of gold. Yet no one has asked gold itself. Gold trades every day and night and to get some idea of what it is doing, it might be helpful to pay attention to what it says. And its “language” is not yours or mine but what it does every day in its technically behavior. That is the basic language of that market and, in fact, any market. So what does gold suggest?
Since gold started its major move in 2005 it has been in a long term uptrend. That uptrend currently intersects approximately down around 1100.00. From 2005 to 2008 it had two small corrections. It was then almost straight up from October 2008 to the September 2011. The more a market rallies, without a correction, the more extreme the correction will be. The dynamics change and that is what occurred with gold. It has not changed the overall trend but it sure has changed the extent of the correction based on the dynamics of the market--with or without the interim rallies it produces in that process.
And that is where traders seem to get into trouble--with the interim rallies gold has been producing during this major correction. And that is where, it seems to me, that emotion has taken over again. Anxious for a retake of that major rally that started in 2005, traders decide that any rally is a return to that great trend. So everyone gets back on the band wagon. But what has gold been really doing?
If you go back to the monthly chart, I would say gold is a “teaser.” When it first topped out in September 2011 the selloff was extensive in one month from 1923.70 down to 1535.00. The ensuing rally looked like a test of the high that failed as the next selloff (1523.90) took out that 1535.00 low. The next little rally failed and gold started to sell off again. Based on the technical formation so far, you would assume that selloff would take out the 1523.90 low. Wrong. Gold stopped at 1526.70 and takes off. Great! The assumption then was that the major correction was done and over with. After all gold tested that low and held. Right? Wrong. What does gold do? It stops short of the high of the first rally (1804.40) when it reached 1798.10 in October 2012. It was only then that gold started technically the second wave down in this major correction. And what a correction. After lulling everyone into thinking gold had bottomed it literally collapsed down to 1179.40 in June 2013.
So that was the end of the second wave down technically in this major correction. Gold then started to repeat what it had done in late 2011. Another rally totally 254.60 points occurred before it again sold off (just like it did in November 2011). And that selloff stopped at 1181.40, definitely short of the 1179.40 low made in June. Now technically that suggests a test of the bottom that holds. Right? Don’t be so quick. And that brings us to today. Gold is rallying and you hear everywhere that gold has bottomed. Near term that is obviously correct but is it a major bottom?
Well, if you look back to what it pulled in late 2011, I would not be too quick to assume that. Why? It could be setting up the same thing again: giving the suggestion of a bottom formation but one that could ultimately fail as it did in 2011. All it did was drag in the weak longs and we all know what happened then. Sound familiar?
So if you are going to look at and listen to the technical behavior of gold I would not be so quick in believing the bottom is in with this “teaser.” We had a low in June 2013 that was tested and held in December 2013 that started the current rally. This is exactly the same setup that gold established in late 2011/early 2012 and it was a false bottom then and could be now.
So far the current rally has been a total of 211.20 points. It has yet to match the previous one. And technically since the 2011 high, gold has had two waves down--the second bottoming in June 2013. It has yet to complete a minimum of three waves down and technically markets tend to do either three or five. So that could add to the probability that this is a false bottom to this major correction.
So has gold really bottomed? Technically that has to be questioned, based on gold’s past behavior. If so, this current potential bottom does warrant calling it “fool’s gold” in that sense for now. Time will tell.