Gold close to a short-term top?
Posted on 11 April 2010 with no comments from readers
The gold price hit a four-month high last week at $1,164 and consequently a new high for 2010. But there is good reason to think the trend could now turn downwards, and bottom out in the summer. That would set the stage for an autumn rally to new highs, well beyond the $1,226 an ounce posted last December.
The main reason for being bearish about the outlook for gold prices at this point is that all financial markets now look overstretched and due for a correction after the long rally since the depths of March 2009. If there is any upside left it is pretty small.
Stock rally slows
The Dow Jones eked out a 0.6 per cent gain last week but against what possible downside? This is what investors always forget: what has gone up too far will surely correct with a vengeance. The last buyers in a sucker’s rally are the suckers.
Actually markets have been moving largely sideways with a slight upward bias. Just look at the gold chart below. This is very much a rally that has been running out of steam for sometime.
If you look at the charts of previous recoveries from financial crashes then the pattern is repeated, a strong V-shaped bounce followed by a substantial correction, often to below the low of the crash.
It could be different this time. But as the excellent new book ‘This Time is Different: Eight Centuries of Financial Folly’ reminds us it almost never is different this time. Betting against history is therefore unwise.
Gold price outlook
In the context of gold a renewed plunge in global financial markets threatens a retesting of the lows of the financial crisis as seen in the chart above. Again it could be different this time with gold as a safe haven and bonds under pressure, but history tends to vote against that scenario.
That said this could be the last chance to buy gold at under $1,000 an ounce. For this sell-off would be something of a climax for deflation and certainly stimulate governments into further inflationary actions.
Gold would then become the ‘ultimate’ or final bubble with confidence in government debt failing and money piling into precious metals. This is when the real highs will come for this gold bull market, and the all the rest has been nothing compared to what is coming.
