On 7/23 I wrote an article for Trader Planet entitled “The Death of Gold.” The essence of my argument is that gold is a true reserve currency only in the minds of a fringe segment of investors who continually prepare for financial Armageddon in this debt-driven global economy. While they may indeed be proven right one day, until then gold is a juicy target for reality-based traders.
By that I mean, as a short sale.
My theory for the last few years is that a bottom in gold will correspond to a top in the equity Bull. If that pairing makes sense to you as a trader and investor, it might be useful to look at the technical pattern in the SPDR Gold Trust ETF (GLD).
Without getting too fancy, one sees the same type of ‘mountain’ as the Nasdaq itself posted pre-and post the bubble years. In other words, it’s a study in extremes. Markets operate on the principle of mean reversion, which suggests that once a bull move is over the bearish phase will usually retrace most if not all of the previous move.
In the case of GLD that move started in earnest in 2007 as the S&P 500 was topping out. I expect a Fibonacci retracement of at least 78.6%, which should cause most gold bugs to capitulate. That degree of retracement would take the ETF down to about 82, corresponding to a price in the $800/oz range.
I suspect that this capitulatory move is about to happen because gold is unable to rally as the equity market falls. This means no one considers it a safe haven anymore. The accompanying chart shows a speed zone just below, which accelerates declines. Alas, the dream of gold as a safe hard asset has run out of time… a dead man walking.
The good news is that this imminent denouement may result in one more spike up in the S&P to new all-time highs before the fat lady sings her final aria.
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