Jul 20, 2011

Gold Rally Close To An End?

Gold reached historical high and many investors are questioning further rise. In following post Elliot Wave analysis and Fibonacci levels are employed in order to predict following gold price move.
The source of long-lasting gold rally could be found in financial assets instability. As a common rule during severe crisis after conventional instruments are exhausted alternative stimulus is established in form of pumping money into the financial system also known as quantitative easing. That lowers currency rate, which helps economy returning back to growth by boosting exports, but inflates commodities. US stimulus started late 2008, depreciated dollar exchange rate from 1.25 per euro (10/2008) to 1.50 (11.2009) and inflated gold price 100% since beginning of 2009 to present.
During last ten year gold rally the only significant correction occurred in 2008. The year of the fear and financial collapse did not spared the precious metal. However the trend was not broken, gold traded above 200 moving average even in that turbulent year. Later when printing machine started the only way for gold was up.
End of June 2011 quantitative easing was officially terminated gold still still rockets the sky. There is another problem keeping it so precious - debt burden threatens credibility of most developed areas as European Union for example. Recent debates for another US debt ceiling raise undermine the dollar. Summarized all those factors leave average investor with limited options for investing. Even government bonds considered riskless now bear higher risk. In such situation gold is perceived as safe heaven investment and price is raising constantly. Unfortunately investors easy forget that market prices have two directions and downside is often possible. Same apply for gold. Maybe the turning point has come?
Previous two gold corrections formed corrective Elliot waves 2nd and 4th.  According to theory each cycle consist of 5 waves positive trend and 3 waves corrective. More details regarding Eliot Wave Theory. On a 10 year chart we distinguish four completed waves. First gold correction during period 2004-2005 is triangle shaped while second appeared 2008 is classical 3 impulse correction. Since then there are almost tree years bull market without significant slide. Is now time for finishing fifth wave, which is last before sharp drop? Applying Fibonacci ratio for 2008 correction gives us important levels around 161.8% and 261.8% retracements. That is $1247 and current strong resistance $1600. Braking last level is crucial for the precious metal. 
Gold Price Close to Important Resistance

Chart source: Saxotrader, Chart analysis: investink.net
If price fail to brake $1600 this could confirm fifth wave and set the beginning of sharp and prolonged correction. Fundamental factors, however, suggest opposite. As long as risk aversion is high gold will find its ground higher. Debt burden and consequent deleveraging process usually takes a lot of time which could limit investment opportunities for a while and gives gold advantage. The forecast for US growth is slowing to moderate and under potential. If economy doesn’t show firm signs of recovery QE3 is option for FED pushing commodities and gold prices to another sky levels. Thus until all problems resolved buying commodities on a dip seems reasonable strategy.
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