Is Gold Overdue for a Bounce?

Back in my days as a trader, I would peruse the lists of 52 week lows looking for reversal candidates. The key was finding an intelligent entry that had a very tight stop, so it presented a good risk reward. I am happy to risk one dollar to make three. Slowly build the position over that line in the sand, so any losses were manageable.

If you are a trader — and I no longer consider myself one — then you have to be wondering when Gold is going to bounce. It has plummeted on little inflation, a strong dollar and an improving economy. When the breathless narrative of hyper-inflation, collapsing fiat currency and end of the world failed to come about, Gold’s spectacular rise ended.

Now, it has free-fallen so far that a counter-trend rally is over due.

How do the typical counter-trend rallies work? Well, the forced selling by margin clerks and futures traders becomes exhausted. A distraction may capture the investing community’s collective attention, allowing some stabilization to occur. As prices stop falling, the fear falling asset holders have been living with dissipates. A little bit of good news, a small reversal in price, and the prior (now discredited) narrative reasserts itself.

Note this scenario is non specific — we see it in stocks, bonds, commodities, real estate and yes, Gold. Apple will run this one day, AIG is already enjoying its turnaround, as all former high flyers do. And if the underlying business model improves, the turnaround could be for real, and the bounce morphs into a new sustainable uptrend.

Here comes the bad news: The bounce in a commodity like Gold — or its primary trading vehicle, GLD — is less likely to achieve that sort of happy ending. The bull market is broken, the prior narrative has utterly failed, and is no longer taken seriously, except by yellow metal jihadists and other assorted suckers.

I was constructive on Gold last decade, but this decade (2011 – ) has not seen the circumstances that are supportive of Gold’s ongoing rise. Despite what some goldbugs have laughably said about me, I am agnostic about the metal, except when it is losing people lots of money. I do detest the narrative driven sales pitch that has caught so many suckers at prices appreciably higher than this.

So what about that bounce?

The charts below show two different ranges where gold can find a footing and rally. That is likely to present your next and perhaps last best exit. Barring some new developments — like all the gold in Fort Knox becoming irradiated — I do not expect to see a resumption of the 2001-11 uptrend.

I don’t have a crystal ball, so I do not make predictions as to where Gold will or will not go. But the weekly and monthly charts lay out two possibly scenarios below.

YMMV.

Gold Chart Weekly
click for larger chart

Gold Chart Monthly

Previously:
What Are Gold’s Fundamentals ? (April 15th, 2013)

12 Rules of Goldbuggery (April 16th, 2013)

Sell Out: “The Other Side” (April 22nd, 2013)

Are You an Investor or a Story Teller? (April 25th, 2013)