Wednesday, December 17, 2008

Gold near a top?

we do not expect the present reflation to hold up for very long. we expect panic and pain and chaos to reëstablish their grip incrementally in the coming weeks. so let's start playing a little game that I think Richard Russell back in the day called 'the Top-Out Parade'. not everything will top out at the same time. some assets lead, while others lag. what's what and when becomes extremely difficult to identify.

one thing we have learned over the years is that Gold often leads other assets at major inflections. we can reasonably expect Gold then to top-out somewhat ahead of say, currencies, commodities and equities.

did Gold top-out yesterday (Tuesday)? yes. that's our tentative conclusion. our confidence in this conclusion is moderate to moderately high. here's a weekly chart of the price of Gold:

from the top in March to the recent low, how many waves up and down do you see? 5? good. now from the low do you see three smaller waves up with this week being the high? yes, so do we.

the pattern such as it is, we can't help but anticipate another 5 wave down sequence to complete this Wave Two correction of the overall Five Wave bull market in Gold.

if 860 does prove to be the ceiling in the near-term and the price does roll over into this bearish 5 wave pattern that we anticipate, then how low can the price of Gold decline? our first target is about 685 (London PM Fix). that would just mean a retest of the lows of the last couple months.

our second target (and you might want to be sitting down for this) is 581. that would be a 57% retracement of the move from the low of 255.95 in 2001 to the high of 1011.25 last Spring.

we should point out that the price could also go up somewhat more from here, perhaps moving closer to 900 before turning down again. we'll find out pretty soon.

Update 10:00 AM: can I take a mulligan on this one? gold's above 870 already this morning. it'll top any minute now! sheesh. in the future I'll try to wait for some sign of a top instead of trying to pull one out of my ass.