Gold Price Decline Not Yet Over

Another day, another drop. Yesterday afternoon, spot gold dropped to slightly below US$1120/oz. That drop took place a little earlier in the day than Tuesday's plummet, and it bottomed at a slightly lower price. Unlike yesterday, there's been no relief rally so far today; after a slow climb to above $1130 last night, gold's drifted down to slightly more than $1120. As of the time of this post, spot gold's at $1124.50. [Update: Now, an hour later, $1129.70.]

The chart that accompanies this report, "Gold dips as dollar firms," shows the last five days's drop. The experts quoted in the story see little hope in the immediate term: "Analysts say the upward trend in gold, which took the metal to record highs at $1,226.10 an ounce a week ago, is unlikely to be resumed before year-end." However, near the end, it mentions that Indian buyers are coming back into the market. "'People are buying on dips,' said a dealer at a Mumbai bank."

This chart, courtesy of stockcharts.com, gives a picture of gold's recent deterioration compared to its recent run-up (click to enlarge):

The line I want to draw attention to is the one at the top, the relative strength index. It's currently at a level that's about the same as the ones that prefaced the last three short-term run-ups. That level offers no guarantee, and all of the turnaround levels are well above what's normally considered a buy signal (30.) However, it does give recent precedents suggesting the correction has all-but run its course.

I should caution that the U.S. dollar is very much back in the safe-haven saddle. Ever since the Dubai World debt crisis, any international-financial trouble has pushed up the greenback. So has unexpected good economic news, because those items fuel hopes/fears of a Fed rate hike.


Formally, by the lights of technical analysis, the bull market is still intact. Along this line, Simon Constable's commentary says precisely that: "Over for gold? Not so fast." He does, however, use $1000 as a possible bottom. More and more commentators are using that figure, although some still use $1100.


Update: Vincent Fernando has posted the same chart as above, with this not-so-subtle comment: "It will be an important next few days for gold, it would appear. This chart is looking extremely ugly, and without some support, it could get much worse."