As a longtime bull on gold, I was thrilled last week to see my "best idea" investment at all-time highs at $1,226. Now, it's off almost a hundred bucks, more than 7%, in less than a week. Should gold bulls be worried?
Sure. Investors should always be worried. And not just when there's a big move in prices that gets your attention. Stocks have been frozen in a go-nowhere trading range for more than a month, after a rally of historic proportions -- that should worry you, too. When your money is at stake, everything that happens and doesn't happen should worry you.
For me, the gold situation is especially worrisome simply because it's hard to get your mind around any market so volatile. Normally, when you look at a chart, you can see prices seesawing around in what pop out intuitively as "trends." You can even draw "trend lines" on charts, and when price movements in a new direction "break" those lines, it's an obvious signal that something important has changed, and deserves further examination. But what do you do in a high-momentum market where prices are moving in one direction so quickly that you can't even draw a trend line? That's the problem with gold now.
I don't mean to indulge in investment astrology here by delving too deeply into "charting" or "technical analysis." But it tells me something valuable when I find that the only vaguely sensible-looking line I can draw on a gold chart puts the trend price now at about $1,075. That's 4% below $1,120 or so, where we are now -- on top of the 7% drop we've already had. So if gold falls through that trend line, it'll already be off more than 12% from the high last week. What am I supposed to do, sell? After it's already dropped 12%?
Even if it does, it'll still be 7% above where it was last quarter-end, the last time it dallied at the $1,000 level. From there to last week's high at $1,226 was more than a 22% run in just 10 weeks. The reality is we're talking about a market so volatile that basically anything can happen -- and none of it may mean anything at all.
To put it into the language of charting, in the last couple months gold has gone "parabolic." In other words, prices have gone from a normal, gentle angle of ascent into a period of pretty much straight up. Some investors treat that, in and of itself, as evidence of a top. They think it implies panic buying, a mania, irrational exuberance. Like the Nasdaq hitting 5,000 in early 2000.
But it's not that simple. Sometimes a parabolic market, if you're just patient, will fit into a larger structure that is much more sensible. For example, in the run-up to Nasdaq 5,000, there were actually a series of parabolas over a period of more than a year. Each time, investors said surely this is the top. They said it at 3,000, and the Nasdaq went to 4,000. Then they said it at 4,000, and then the Nasdaq went to 5,000.
They were finally right when they said it at 5,000. But man, oh man, had they been wrong all along. A lot of money got left on the table.
The same thing could be happening with gold. Fine -- there was a parabolic run from $1,000 to $1,226. Now it's in a sharp correction. But let's say it is just a correction, not the end of the bull move. Let's say the gold price stabilizes somewhere above $1,000. A that point, time will have passed, and what do you know -- the chart won't look so parabolic anymore. We'll even be able to draw a very conventional looking trendline using the bottom point of the correction to anchor it.
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