After a strong start to the year (Gold is up over $200 per ounce or 15% YTD), many investors have already concluded that the Gold’s bear market is now over. How do we know for sure? Well, no one can really say anything for sure, but before we jump on a bandwagon too, let us examine two simple charts.
Chart 1: Gold’s bullish case scenario could play out similar to this…
Source: FinViz (edited by Short Side of Long)
Without getting too technical about things, let us agree that Gold’s line in the sand is between $1350 and $1400. The price is here right now. This pivot was a support (demand zone) during the crash and eventually it became a resistance (supply zone) as prices broke lower into June of 2013. Assuming you agree with this polarity line, you could agree that this is the most important pivot for the current bear market.
Now… let us assume I am a precious metals bull in the short term. Here are some observations I would be arguing, as seen in Chart 1. For the bullish case to be validated, price would have to see a higher high above $1425 from August 2013. So that means a strong breakout towards $1500, followed by a sound re-test of $1400. If and when that resistance turns into support again, we would have a completed base. That would give Gold a sound bottom, a process that lasted from $1400 level in April 2013 towards $1400 around July 2014. From there, good seasonal period (August 2014 to February 2015) could carry us higher into years end.
Chart 2: …while Gold’s bearish case scenario could play out like this!
Source: FinViz (edited by Short Side of Long)
From the other perspective, let us now assume that I am a precious metals bear in the short term. Observations regarding this case scenario are seen in Chart 2. Bears would not believe the downtrend has ended, until $1,425 per ounce its bettered. Most bears could argue that the final low is actually coming sometime later in the year, while the current rally only as a part of consolidation before that breakdown occurs. In other words, all we are doing is working off oversold conditions from 2013.
Many times before, market participants have stated that Gold’s bear market is already extremely aged (September 2011 until December 2013) and overdue to end at anytime. First these guys were comparing Gold to 2008 correction. Eventually, as the downtrend continued, gold bugs realised bear markets can last a long time. I guess that is what happens when PMs sector enjoys a decade long bull market – investors forget the risks of downside.
While I agree that Gold’s bearish correction is extremely long by any count, we could argue that since Gold enjoyed an astonishing 12 years of annual gains in the row, prices might be mean reverting with a super long bear market (two to three years of annual losses). I remember when I first told various investors that the price of Gold will correct below $1530, because it was up for 12 years in the row, they called me crazy. I’m sure that even discussing the possibility of going down for two or three years in the row, would do the same. Only time will tell so watch how Gold interacts with that $1,400 per ounce level very closely.
Side note: Charts above are only estimates and assumed case scenarios. I am not actually predicting exact price levels nor time periods. Charts are constructed so it is easier to envision a bullish and bearish case scenario from a simple and basic technical price perspective.