Gold Heading to ‘Fire Sale’ Prices

I like gold. But there’s a time to buy and a time to sell.

Over the next two weeks, I’ll walk you through my analysis on gold. In this analysis I’ll show you why gold is going to US$931 dollars per ounce next year.

One reason is due to the bullish stock market run. Despite the mainstream media calling the stock market a ‘bubble’, this rally doesn’t look anywhere near the top…far too many people remain bearish, and interest rates are still too low.

There is a clear thirst for yield out there, pushing more and more people into the stock market. This should result in the stock market hitting new highs next year.

In this case, the chase for yield will likely mean a sell-off in gold. After all, gold doesn’t offer any yield.

The best way to explain this is by looking at the technicals. This is because markets are irrational and spurred by emotions. In this case, technical analysis tracks the emotional history of investors by analysing price movements. This is why it’s useful to use both technical and fundamental analysis.

The chart below shows the long term gold price. Each bar represents one month. Note that this is a logarithmic chart, which smooths out price volatility over the long run. This is only useful for looking at long term charts, not short term. I’ll show you a normal (arithmetic) chart next week. 

Gold Price with support lines
Source: Freestockcharts; Diggers & Drillers
Click to enlarge

The technicals show that gold is in a long term uptrend and has been ever since 2001. Saying this, I expect the long-term bullish pattern to break down in the next year or two.

Here’s why…

For starters, it’s naive to assume that any bullish pattern can last forever. If they did, then everyone would be rich. In this case, using support and resistance lines, I’ve displayed some important price levels.

It’s clear that gold has gone through a consolidation phase since the start of 2013 — this is between the mid-range and major support levels. There was a similar consolidation phase when gold was trading above US$1,600 per ounce. As you’re aware, it quickly fell to US$1,180 per ounce in 2013.

This was a time when gold fell through the major support level, technically at US$1,553 per ounce. This is now the major resistance line shown above. In this case, gold must breakthrough and hold this level if it wants to move towards the US$2,000 per ounce target.

The new major support level, shown by the red line, is at US$1,190 per ounce. This was the level where gold hit its double bottom in 2013. If gold falls through this level, it’s likely to quickly decline to my target of US$931 per ounce. This is exactly what happened when gold fell from US$1,600 to US$1,180 per ounce in a matter of three months.

The current gold price of US$1,314 per ounce is below the mid-level support of US$1,360 per ounce. Gold must break this level to move higher. And this must happen in the next couple of months.

It’s possible this could happen on the back of European sovereign debt concerns. Specifically, around September and October, when the bank stress testing results are due. But, as always, the issues will likely be ‘patched’ over, and this run will likely fail.

As you can see, the current consolidation pattern of 2013–2014 is very similar to the 2011–2012 pattern. And given the inability of the gold price to move above the mid-level support level of US$1,360 per ounce, it suggests that gold could go lower soon.

This is why I see gold falling to US$931 next year — a repeat of the pattern that happened in 2013 when the gold price quickly declined.

Regards,

Jason Stevenson+
Resources Analyst, Diggers and Drillers

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3 responses to “Gold Heading to ‘Fire Sale’ Prices

  1. Hi Jason,
    I think you may be neglecting the influence of the Bullion Banks and their suppression of the Gold Price through massive naked short selling on US Gold Futures markets. If this price manipulation wasn’t taking place, Gold would already be well north of $2000 per Oz. Ed Steer’s excellent daily report on Gold and Silver includes a lot of information that is relevant to this discussion. Volumes, prices, who’s Long and who’s Short, US Mint sales volumes and to who… Big Banks with their QE $ are manipulating hard out. How long can they go on? Who knows? But there is lots of support around $1200, which is near extraction cost for a lot of Gold Miners.

  2. Hi Jason,

    The US$ price for gold is one thing; the AUD price is of more immediate importance to me. It seems to me that at US$931 an ounce, an exchange rate of around 59 US cents/AUD leaves me at about the same level I would be in if I bought gold in Australia now. The chances are the AUD might very well weaken to that level in the time your forecast says gold will drop. So what’s all the fuss about?

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