Major support gives way
On Friday 12 April, gold fell dramatically through $1525, a line which had acted as a sturdy floor over the past 18 months or so. Then, on Monday 15 April, the cascade continued, with the yellow metal plunging to as low as $1,355, its lowest price since February 2011. It is now down around 30 per cent from its all-time record high of $1,925, which it hit back in September 2011.
Gold's many detractors have not tried to hide their glee at the collapse of the "barbarous relic". For them, this plunge marks the long-overdue bursting of a horrendous bubble, as well as a triumph of the leading central banks' policies and public faith in paper money. By this logic, the crisis has been contained and normalcy is returning. "The decline of gold and the rise of stocks is a big trend that everyone should cheer," writes Joe Weisenthal of www.businessinsider.com.
I have been an advocate of gold since December 2003, when its price was around $400 an ounce. Even after its peak in September 2011, I have always argued that it would head to well over $2,000 an ounce before the boom ended. Clearly, the latest plunge represents a serious challenge to my bullish case. Can I really still stay optimistic about the very big picture outlook after this carnage on the charts?
Previous bull market corrections
The first thing is to determine quite how serious the technical damage actually is. It is worth noting that gold has suffered major bull market sell-offs in the past, after which it went on to make new highs. A good example of this was in 2008, when it dropped almost 30 per cent in just eight months. Mid-way through the 1970's boom, it shed an eye-watering 49.6 per cent of its value, before soaring from a low of $103 to a record peak of $850.
Most oversold since 2001
The latest tumble has also left gold's momentum reading more beaten up on its monthly chart than the summer of 1999, just as it was bottoming out ahead of the mighty boom of the next dozen years. The monthly relative strength index currently stands at a depressed 38 per cent. In the mid-1970's meltdown, the reading sagged to just 31 per cent before the recovery began. That leaves scope for further selling, based on past experience.
The oversold lows of 1976
History also suggests that gold might decline to around a previous high or low before it forms a bottom. Worryingly, there is not much in the way of past peaks and troughs before $1,180 or so. And really good support only kicks in below $1,000. Were gold to get down to those sorts of levels, the prevailing belief would surely be that the yellow metal had entered another long-term slump, like that in 1980-1999.
It is perhaps premature to start considering when to buy gold again. However, I would be willing to re-establish a big long position again on a powerful bounce back through the 200-day average. I'd also respect a signal from my gold-buying model, of which more in a future edition. By the same token, though, I regard the reports of the death of gold's uptrend since 1999 as greatly exaggerated.
