Gold experienced a spectacular bull market run from its low at $250 an ounce in 2001 to its peak above $1,900 an ounce in 2011. Its long bull market was largely supported by expectations that the Fed’s easy money policies would create spiraling inflation, of which gold, the historical hedge against inflation, would be the big benefactor.
However, spiraling inflation did not materialize. In fact, inflation remained quite benign, and in 2011 gold gave up on the idea. It rolled over into a 37% bear market decline to $1,200 an ounce.
As with most bear markets, it was not a straight line down. There were rally attempts that kept hope alive, but they ended at lower highs, followed by declines to lower lows.
For the past 18 months, although the lower highs continued, there were no further lows. It looked like gold might actually be establishing a base from which to launch a new bull market.
A significant decline in the U.S. dollar supported that hope. Gold and the dollar have an inverse-relationship, gold usually rising when the dollar is declining, and falling when the dollar is rising.
However, our technical indicators triggered a new sell signal on gold, and it fell back beneath its 30-week m.a., and has continued lower.
And in the background the U.S. dollar began spiking up in May.
Also among the fundamentals, the previous inflation concerns moved even further out of the picture. Recent reports of even lower PPI and CPI inflation in the U.S. and in the euro-zone have concerns rising that the real problem may even become global deflation.
It also became more apparent that gold was in trouble when it was unable to rally to any extent as a safe haven in reaction to the growing number of global hotspots and uprisings in recent months.
Meanwhile, I pointed out in a recent column that gold was dropping toward a level that would be its last potential stand.
Gold had been confined in a symmetrical triangle formation. The direction of the breakout from such a formation usually determines the next sustained direction.
So, it was not a positive for gold when it broke out of that formation to the downside and immediately headed lower.
I noted that the critical level was its previous low at $1,295 an ounce. A break below that would put it at a new bear market low and in uncharted territory.
With the U.S. dollar spiking up further in reaction to Friday’s employment report, gold has been trading as low as $1,189 an ounce.
With our technical indicators, both short-term and intermediate-term, remaining on sell signals, I believe gold is headed lower. If so, it looks like next potential support is just under $1,000 an ounce.
Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com. He can also be followed on Twitter @streetsmartpost.
Images: Flickr (licence attribution)
Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.
It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.
In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.
There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.