Where Will Gold Bottom in this Corrective Cycle?
Source: Dave Banister, Active Trading Partners (2/5/10)
This correction so far in gold is normal in a bull market, and is intended to knock everyone off the back of the bull. The bull likes to make sure as few people as possible are along for the ride.
Currently we are seeing a strong counter-trend rally up in the USD. Investors should keep in mind that the dollar index is simply a mathematical calculation against a basket of other currencies. In this case, 57% of that formula is the euro. The euro has had a dramatic correction and is likely to continue to drop due to problems in Greece and other countries. This makes the dollar look better on a relative basis, but investors should remember this is largely cosmetic. Deficits continue to balloon, debt ceilings are raised, and the U.S. Treasury has to rollover a significant amount of Treasury Bonds this calendar year. Traders and Investors overreact to the rallying dollar and start selling off gold and silver as fast as they can. However, at some near-term point, gold is likely to firm up and bottom regardless of the dollar rally. There has been no fundamental shift in the USD or its merits in my opinion, and in fact, the recent economic events are only making gold look more attractive relative to other world currencies. This pullback is required to work off the excessive optimism we saw in early December.
Most recently on January 22nd, I wrote an update to my December 4th forecast for gold. In that update, I mentioned that gold was in a "C wave" down and would likely bottom around 97-102 on the GLD ETF. You can read the entire article here. A pullback in gold to the 102.50 area on the GLD ETF would fill a "gap" in that chart, and represent a normal bull market 50% correction of the last swing. A further decline to the 97–98 area on the GLD ETF would represent a 61% Fibonacci retracement of the entire rally from April 2009 into December 2009. This correction in my opinion could continue into early March or May of this year, before the next leg up begins. Gold investors are advised to scale into gold as $1,040 U.S. is hit, and all the way down to $980. At that point, the bull will continue to new highs as the smart money will be accumulating the gold dips in my opinion over the next 30–90 days.
David Banister is the Chief Investment Strategist and founder of Active Trading Partners. David uses his unique methods of forecasting major market turns in addition to gold, oil, sectors, and individual stocks with counterintuitive methods he has developed over 20 years of investing.