Long-Term Prospects of the Gold Market


Gold’s price has been up every single year since 2000 but it will finish in the red this year. Therefore the impressive streak of gains is finally going to end. With this year’s depreciation the interest towards gold declined substantially, however, many traders are now trying to guess the bottom level of the current trend, which seems to bring the interest in this commodity on the rise again. The topic of this article is to discuss the longer-term trends of gold, and this is why we will focus on the monthly and weekly charts.

Gold charts analysis

Let’s start with the monthly chart of gold. After 21 years in a bear market (from 1980 to 2000), gold started a strong and spectacular bull run in the second half of 2000. Its price jumped more than 7 times - from $250 to $1920. The actual peak was reached in September 2011. I personally remember the day of the top very well because the rise of gold was discussed that evening even in the prime-time news program on the most popular Bulgarian TV channel. According to the reports people were buying physical gold like crazy and several gold brokers commented that they couldn’t manage to deal with all the demand. The uptrend was very strong at that time and I had no objective argument to expect a peak, but I felt a top might be near. Consequently the gold declined by almost $400 in just a few weeks.


Now, as you can see from the chart, this initial leg down was followed by a period of broad consolidation between 1522 and 1800 that lasted more than a year until gold broke down below the 1522 support in early 2013. Now, the conclusion from the monthly chart is that the major trend is currently down. The key level of resistance is the 1522 level (former level of support). The medium-term downside target is seen at levels near the psychological $1000 level. Eventually though I expect to see gold even lower than that, most likely at $700 in the next few years.

Of course one can argue that gold has seen enough correction of its bull market, and it is time for the bull market to resume. I personally do not buy that idea because I have observed that corrections and consolidations in gold (and not only gold, that’s valid for many commodities) usually last longer than the bull market. That’s why I think we have entered a very volatile period of huge gyrations but eventually gold will head lower.

Now, let’s see the Medium-Term picture by focusing on the weekly chart of gold:


As I noted earlier in the article, gold reached a peak in September 2011 but then it spent several months trading sideways. This sideways trading of almost 18 months is considered a Phase III Topping Formation if you are familiar with the market phases approach of technical analysis. Therefore the real bear market began in February 2013. Then in March gold broke down below the key 1522 support level and confirmed the new market trend.

Now, the immediate pressure is definitely on the downside as the prices are below the declining 21-week (red line), 100-week (blue line) and 200-week (green line) moving averages. The most likely scenario based on the moving average approach is shown on the chart. I expect a move down towards $1000 where gold is likely to form a Medium-Term low in the 1st quarter of 2014. Then we may see a powerful rally back towards $1400/1500 before the long-term negative trend resumes.

Looking at gold stocks

One good way to confirm the trending conditions in gold is to take a look at the trend in gold stocks. I am sure most of the traders on the forex market that trade gold do not look at gold stocks as they simply do not follow the stock market trends. But I have found over the years that while gold stocks follow the trend of gold, they usually lead near the turning points. That is, if they bottom out and rally for some time while gold continues lower, it is likely gold to eventually turn up. Let’s see the current trend in gold stocks that is best reflected in the gold stock ETF – GDX.


As you can see from the GDX weekly chart, there is no sign that gold stocks have already made a bottom. Actually, the picture is quite the opposite: gold stocks have now broken down from a several month consolidation pattern. And that means gold is more likely to continue lower in the next few months. At least that’s the message gold stocks are sending us now.


Every piece of evidence that we have suggests that gold is now in a multi-year bear market that is likely to eventually bring prices down to $700. Shorter-term - gold is likely heading for a bottom near $1000 from where it may recover sharply for several months in 2014. Of course, the fact that all charts are showing the trend is lower, is not a reason to be complacent and expect easy money on the short side. As always, our job should be to be positioned correctly with the prevailing trend, but also to manage our emotions and to manage risk properly.

Alexander Nikolov