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Final Bottom or Not, the Situation for Gold Remains Bullish

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Gold's price doesn't seem likely to decline much further and could actually move much higher very soon.

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The recent precipitous plunge in precious metals was one of the biggest sell-offs in recent memory. The gold "Flash Crash" even prompted a serious newspaper like the Financial Times to run a headline stating "Flash Crash Rouses Suspicions of Witchcraft."

According to the Financial Times article:

Apparently, someone, or, rather, two someones with proprietary trading algorithms decided it was time to sell the futures equivalent of 31 tons of gold on the Chicago Mercantile Exchange. The crash happened between 10.40am and 10.54am eastern US time, with the biggest part of the decline taking place between 10.43 and 10.44, with a further drop in the couple of minutes before 10.54.

My comment is that even if it were two entities that ignited the downswing – hasn't it been the case many times in the past that only a few entities start a downswing? Consequently, couldn't it be that simply someone had to start it because the decline was very much in the cards based on emotional (a.k.a. psychological / technical) reasons that I have outlined previously? Finally, couldn't it be the case that the big entities that started the rally shared the same emotional approach that the rest of the market did?

This certainly could have been the case – in fact, it's quite likely that it was actually the case, and that's why such "unpredictable" moves can be sometimes predicted (not all of them, but enough to make serious money on this phenomenon).

The bottom line of the crash is that somebody must have been happy to buy 31 million ounces of gold at a discount. The crash "shook out the weak hands"; the small investors and speculators who are flushed out of the market by stop-loss sell orders and margin calls.

Let's keep things in perspective. The crash was insignificant in the context of gold's past performance -- up some 500%, or 19% annually over the past 10 years and 14% this year through Tuesday evening before the flash crash.

If the Federal Reserve tightens monetary policy, will that mark the end of gold's decade-long rally? At least for now the Fed has promised to keep rates at zero until 2014, which is very bullish for the gold market. Rates are on hold, and that is not likely to change.

Let's begin the technical part with the analysis of gold itself. We will start with the very long-term chart (charts courtesy of http://stockcharts.com.)



We begin with a look at the very long-term chart. Last week saw several important developments as gold's price decline approached the 50-week moving average while the relative strength index level remained slightly above the 50 level. This is a bit ambiguous with respect to what likely seemed to be needed for the final bottom to form.

It seems that the moves may be close enough to the final bottom if, in fact, it's not already in. The risk of being out of the market appears to outweigh the risk of being in the market at this time, as the downside is limited and upside is huge. Even with the ambiguities in the trading patterns, I view the situation as bullish.



Looking back to gold's 2006-07 chart, we have the most interesting analysis of today's essay. I have attempted here to show how the trading patterns of gold in 2006 (red and black ellipses) may correspond to the upswings in today's market. At this time, it seems that we are behind the one reflected by the red ellipsis and about to see the second one. Please note that gold moved to the area between 50% and 61.8% Fibonacci retracement levels before finally bottoming.

Consequently, as of March 14, the final bottom may already be in (or be in very shortly).



A few days ago (at the above chart's cut-off point), I wrote that it seemed at first glance that the downside target level was not yet reached. It is important to note, however, that the upper border of this target level was in fact reached a few days earlier than expected. It appeared that this should be viewed as the bottom being in with the only question being "is it a local or final bottom?" It was too early to answer this with certainty, but based on today's price action, it seems that gold is now very close to its final bottom for this decline.

The points made above are confirmed by my firm's SP Gold Bottom Indicator, which flashed a long-term buy signal last Tuesday. I analyzed its indication in details in my previous essay on the possibility of a move up in the precious metals market (see Possibility for Bounce Up in the Precious Metals Market):

(…) on Tuesday, our SP Gold Bottom Indicator flashed a long-term buy signal. The indicator is just one of the unique proprietary investment tools developed by Sunshine Profits, available only to our subscribers. We tend to take this particular signal seriously since it has proved to be uncannily accurate in the past.

Summing up, while it is not yet certain that the final bottom is in, it seems rather unimportant because gold's price does not seem likely to decline much further and could actually move much higher very soon. The risk of being out of the market outweighs the risk of being in.

Thank you for reading. Have a great and profitable week!

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
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