The weekly chart of the spot gold price shows that gold setting up for a very important test next week. The test is to see whether or not the gold price can hold longer term uptrendline support on the weekly chart.
The uptrend shown in the first chart below is a 2 year uptrend line and has a good degree of significance. If we break down through this trendline on the weekly chart next week then one has to question the current integrity of the gold bull market in my opinion.
If gold breaks down through the uptrendline next week then it would probably challenge the 1160 level which is an important level of support as it was the neckline level of the previous inverse head and shoulder bottom formation (see it drawn in on the first chart below).
If 1160 breaks then it could imply an eventual test of 990 level which once again is a very important level of support and again the neckline level of the previous massive inverse head and shoulder bottom formation.
Perhaps I am looking much too far ahead, but if we do get to 990 and then 990 also breaks it could imply a move down to 680 as a possible final bottom. That would be roughly a 46% drop from the spot gold all time highs.
I think it is important to keep in mind that the gold price has been going up since 2001 or almost 10 years. I am probably repeating this line of thought from a previous post, but even very strong bull market uptrends sometimes need a mid point correction as a pivot point for the eventual blow off down the road.
Gold in the 1970s
This is exactly what happened during the mid 1970’s in the gold price.
Gold went from 35 to 200 into 1975 or 471%. But then it went into a 50% correction down to 100. That eventual 100 dollar level in gold was the pivot point for the eventual massive blow off run to 850 gold price or a move of 750%.
At the time the gold price hit 100 there were likely mining stocks at that time available for literally pennies on the dollar.
If we do go into an eventual 50% drop in the gold price it would likely slam down the mining stocks very badly because the mining stocks have such high betas relative to the gold price on the upside and on the downside. So a 50% drop in the gold price could mean 90 to 95% drops in certain mining stocks.
If we calculate the percentage move in the gold price since 2001 we see that it has gone from 253 to 1265 or a 400% move so far. This move is similar to the 471% move in the early 70’s but shy of it by about 70%. A price of 1450 gold would make the gain from 253 about 470%.
Of course the comparison periods do not have to be exactly the same. It would be absurd to think that they should be. It is a rough comparison the past bull run to the current one.
Gold Price at 5780 ?!
So assuming we do break down to 680 eventually, then also continue from that point into the eventual massive blow off run of 750% it would lead to an eventual target of 5,780 dollar gold price.
So when the gold bulls talk about us zooming to 2000, 3000, 4000 and 5000 dollars gold price, they may be forgetting to consider the important point that even long term bull markets need large corrective pivot points as catapult point for the eventual blow off.
It seems easy to forget sometimes that gold is actually a commodity and trades like a commodity. Lately it just seems like it is trading like proctor and gamble with low volatility. But gold still is a commodity and you just have to look at a long term price chart of the CRB commodity research bureau commodity index chart to see how volatile commodities can be.
It is going to be interesting to see how this plays out. If it does evolve into a multi year bear market then I will be watching the monthly MACD looking for it to transition back down to the zero midpoint line where an eventual massive buy signal would probably be triggered again. Stay tuned to BestOnlineTrades because if this plays out similar to what I write in this post then that buy signal near the zero line will probably be the greatest buy of a lifetime.
The monthly MACD is starting to curl over into a sell signal but is not near confirmation yet. It takes a long time to move the monthly indicators for obvious reasons.
Gold Parabola holds the Key
Lastly, take a look at this comparison chart of the 70s gold bull run compared to the current bull run. You can see that the personality of the gold price is to trade into high arcing parabolas after an initial launching plane. This parabola price action is of course very nice when the trend is up, but when it decides to correct it can be severe in the opposite direction.
The run from 100 to 850 was much more persistent and powerful than the run from 35 to 200. I would expect a similar situation to be true from a move from 680 to 5800.
Multi millionaires and billionaires are going to be made from the gold bull market. But for those long since 2001 how many would still hold on tight with strong hands if gold goes to 650 ? Keeping an eye on the psychology is going to be very important as the longer term trend transfers from bullish to bearish.
But before anything can transfer, we first need to break the up trendline support as indicated in the first chart and in my beginning commentary.