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It’s already been a month since gold fell almost $200 in twotrading days. This head-spinning drop damaged the bull market. It broke theback of a STRONG market, but that doesn’t necessarily mean the mega uptrend isover.

Our first potential downside target level for gold at the$1300 to $1450 level was reached. And we could see gold decline further in themonths ahead before a bottom is found.

DOWN, BUT NOT OUT...

As of the mid-April low, gold is down about 19% for theyear. If gold ends the year near these low levels, it’ll be the first time in12 years gold has had a down year. Assuming this happens, the 660% rise from 2001 to 2011 would be downabout 28% from the peak, which isn’t bad in perspective.

During the last 12 years, gold rose without inflation, witha war on terror, during the worst financial crisis in decades, through anunprecedented debt build up and during years of economic sluggishness.

This time period also saw the U.S. dollar decline amidgrowing doubts of its reserve currency status. And it’s been a time when manycountries have protected themselves from uncertainty by buying the most gold in50 years.  That’s because our presenteconomic situation is nearly unparalleled in U.S. history.

... WILL RECOVER

This almost $200 gold fall is coming on the heels of asluggish gold price since Sept 2011. Gold tested the $1536 level twice in thelast 1½ years, but this time around took the cake.

Gold’s two day fall was the worst since 1980.  And as investors lost confidence in gold,April also ended with the world’s largest ETF, GLD, having its biggest monthlyoutflow since it began.

In hindsight, it makes sense that with so many sell ordersnear the lows, it triggered a snowball decline.

For now, this drop has sparked a lot of controversy betweenthe gold lover’s camp and the gold haters. It’s a passionate situation.  And depending on your outlook, you could sayboth are right.

We are of the camp that the bull is wounded but it willrecover.  It may take time to recoup andwe’ll likely see more volatility before any kind of decent rise develops.

THE 1974 -1976EXAMPLE

This bearishness can only be compared to 1976 when goldreached a low in-between two bull markets. It was amazing.

Gold fell 50% from its almost $200 high in December 1974 toits $102 low, and it took almost two years to do this. That was enough to callit the, “Great Gold Bust”… in spite of its 460% run up from 1970 to 1974.

Often, the length of time a decline takes tends to be morebearish than the decline itself.  In2008, for instance, gold fell almost 30% in eight months.  It was fast and furious but sentiment didn’thave a chance to turn too bearish.  Plus,almost everything else was worse.

Today is similar to 1976 because of the time it’s beentaking.  Investors were getting turnedoff by the sideways gold market for the past 1½ years before it plunged lastmonth.  And especially so because thestock market has been soaring this year.

Chart 1 shows youtoday’s gold fall from its September 2011 record peak compared to the 1974-76time period. We indexed the peaks to 100 so you can see true time andpercentage decline comparisons.

Interesting here is, so far, gold has given up almost 30%from its peak and it’s getting closer in time to the 1976 lows.

That is, gold fell 50% in 1976.  If today’s decline is similar, we could seegold near $1,000 by June. That would be the same type of fall in time and priceas in 1976, and it’s the worst case scenario.

GOLD UNDER PRESSURE

For now, gold continues to feel pressure when worriessurface that the Fed will cut back on its easy monetary policy, yet it’s veryunlikely, at least for this year.

Currently, the stronger U.S. dollar of late is the realpressure on gold. 

As long as the dollar is strong, we’ll continue to see goldstruggle.  The collapsing yen, forexample, is bearish for gold because it pushes up the dollar.

Meanwhile, let’s take a look at the downside and what tokeep an eye on...

Chart 2A showsthe stepping down levels. Now that $1536 has been clearly broken, it’s becomethe first key resistance level.

The next support is the 2011 lows near $1320 (which alsohappens to be the intraday low for the latest fall). This level is importantbecause if it’s broken, we could see gold slip below $1200, near the 2010 low.And in a worst case, the 2008 peak near $1000 is the ultimate support.

Our indicators show that this $1000 level would be anextreme case and if tested, it’s unlikely it would stay there for long.

Notice that our favorite indicator has fallen to an extremelow area (see Chart 2B). Mostinteresting is that it only went below -1 in two other extremes, in 2006 and in2008, and in both cases it preceded strong upmoves in gold.

On the upside, if gold rises above $1450 it could bounce up to $1536. 

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Mary Anne & Pamela Aden are well known analysts andeditors of The Aden Forecast, a market newsletter named 2010 Letter of the Yearby MarketWatch, which provides specific forecasts and recommendations on gold,stocks, interest rates and the other major markets. For more information, go towww.adenforecast.com

-- Posted Monday, 20 May 2013 | Digg This Article