Investorstoday

Tuesday, December 20, 2011

The Bull Market in Gold is not Over




Gold’s plunge below $1600 per ounce caught many market participants by surprise wondering if the bull market for the yellow metal has ended.  For those that understand the gold market and the fundamentals underlying the 10 year bull run the answer is a resounding no.

The charts may show a lot of technical damage as gold has pulled back to test its 50 week moving average retracing the entire summer run despite the continuing problems in Europe and Washington DC.

Just a few short weeks ago six major global central banks, in a coordinated move, cut swap rates and extended maturities which set off alarm bells around the world.  Market participants quietly wondered if this was the cover for a bailout of a global financial institution. 

The downgrades of seven global banking powerhouses last week in addition to rumors that the Commerzbank in Germany may be the subject of a government bailout did not help soothe the markets.

The dichotomy between the fall in the price of gold and the continuing global banking problems indicate that one or the other will break.

The first quarter for gold is known historically for its strength and 2012 should prove no exception.  The problems in Europe remain unresolved with leaders now hoping for a comprehensive solution to be finalized by the end of March. 

Historically, gold has not moved up in a complete straight line, instead moving in spurts followed by periods of sideways trading lasting more than a year.  Corrections during this period of sideways trading typically range around 20% and with gold now up over $1,500 the corrections become magnified in terms of numerical significance.

As shown by the chart below, the most recent move was the longest of the bull market lasting 21 months and a break is needed in order to consolidate before moving higher. 



The first quarter rally may not take us to new highs but this period of consolidation will set the stage for the next move up.

The first four moves up for gold averaged approximately 50% and the last move almost doubled the price meaning that the next move will likely take us close to the $2,800 level.

Get ready folks, with major money center banks being downgraded and European nations put on watch the stage is being set for fireworks in the coming years. 







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