Traders and short term speculators are focusing on gold's breakdown out of a triangle pattern this week. I’d assume trend followers are jumping in with expectation of even lower prices to come. This is definitely a possibility, as I’ve discussed gold’s future price direction all the way back in middle of March.
Personally, I am looking for gold to eventually break below the $1,200 support level, despite being a long term bull. How low will it go before a final bottom is in place? I am not sure about that, as I don’t have a crystal ball. Let us look at the history.
Chart 1: Gold will most likely post a lower low, below the $1200 support level
Source: Short Side of Long
So far, gold’s bear market is not extremely oversold on historical price basis. It is only slightly lower then the mild correction we saw in 2009. The bear markets in 1975/76, 1983/85 and 1996/99 were larger declines, while the post bubble crash in 1980 was huge relative to the current sell off.
However, bear markets aren’t only counted in price, but also in time. Assuming the current bear market in gold is still in progress and breaks down below $1,200, it will be the third longest in its 40 plus year history. For what its worth, the current gold bear market is following the 1996/99 sell off quite closely. If it was to mimic it in similar fashion, one could conclude that there is more consolation and a final lower low to come (see my prediction in March).
I will say that despite more potential selling, I hold a view that gold remains in a long term secular bull market. I know many will doubt this opinion, and the lower prices go, the more negative people will become. Personally, I plan to use this as a buying opportunity as I see gold above the $1921 record high and silver above the $50 record high in coming years.