Is gold really in a new multi-year bear market? No!

Reuters reported last week that technical analysts regard gold as being in a new multi-year bear market. Reporting from a conference of the US Market Technicians Association, a Reuters’ journalist interviewed Robert Prechter, the head of Elliott Wave International. Mr. Prechter is quoted as saying that gold would be in a major bear market lasting for some years. Furthermore, Mr. Prechter compared the technical situation of gold with the development of the NASDAQ Composite index at the end of the dot-com bubble and the real-estate boom in the US in 2006. Other technical analysts also expressed bearish views for the price of gold and expect that gold had seen a multi-year high.

It is correct that it is now almost 18 months ago that gold had reached its all-time high at 1,920$/oz in early September 2011. It is also correct that gold is trading now for some time below the steep upward trend line, which originates at the low made in 2008. However, is the break of an upward trend line already a proof that a market is now in a bearish trend? In the binary world of the computer age, one might be inclined to answer this question with a yes. But this is not correct for several reasons.

First, in the literature on technical analysis, there is a broad consensus, that there are three types of a trend, an upward, a downward and a sideways trend. Thus, breaking a trend line does not automatically lead to a bearish trend. Second, according to the Dow Theory, a trend is only reversed if prices fall below the pivot low of the move leading to the high. This is not the case, as gold still trades above 1,478 $/oz, the low made on July 1, 2011.

Third, the selection of the starting point for a trend is often highly subjective. Gold hit a major low in the summer of 1998 at 251$/oz in the wake of the Russian debt crisis. Another low in 2001 came very close to this low. If one dates the low in February 2001 as the starting point for the trend, then the upward trend is still intact. Also using correction lows between this date and the summer of 2006 as starting points would lead to trend lines coming on close to the long-term trend line from 2001. This leads to the fourth point. It could be observed very often that steep trend lines are broken, but trend lines with a lower slope remain well in place and that prices do not retrace back to those lines.

Furthermore, it is also not appropriate to compare the current situation of the gold market with bubbles in stock markets and the US real-estate market in the mid-2000^th. Whether it was the Japanese Nikkei index in 1990 or the NASDAQ index ten years later the bursting of a bubble showed the same pattern in the charts. Stock prices fell sharp and quickly. The NASDAQ index lost more than 40% from its high in 2000 within less than 3 months. After a short rebound, the NASDAQ index lost almost 75% from the high within 18 month. The development of US housing prices after the peek in 2006 showed a similar pattern. Also stock markets in 2008 showed a similar pattern of sharp losses within only a relatively short period of time. However, looking at the chart of gold, this pattern did not emerge.

Another technical tool to compare the current situation of gold with stock markets after bursting bubbles is to look at the Fibonacci retracements. Unlike expressing losses as a percentage of the highest price reached, this tool is looking at the percentage relationship between a retracement and the preceding movement. An upward move is regarded to remain intact, if the retracement does not reach certain Fibonacci levels. The NASDAQ in 2000 retraced more than the 50% Fibonacci level within 3 months and 100% of the preceding upward move within 18 months. In the case of gold, the retracement since the high in 2011 has been made remained always above the first target level of the 38.2% Fibonacci level, which is at 1,446$/oz.

Despite the sharp decline last week, gold is still in a sideways trading range. And as long as gold trades above the low from July 1, 2011 at 1,478$/oz, we regard gold as remaining stuck in a sideways trend. The sentiment for gold is bearish among analysts and also some investors, as the development of ETF holdings and the CoT report of the CFTC show. Thus, the risk of a further downward move is rather high. However, technical indicators point to an oversold market in the daily and weekly time frame. Therefore, gold has still a good chance to remain further in the almost 18 months old trading range. Thus, gold is not in a new multi-year downward trend, at least not yet.