It’s always hard to keep the long-term perspective in mind when you “know” an asset, such as gold, should be rallying much more than it is. People who first learn about markets are inclined to believe that fundamentals and rationality should dictate price action in a linear fashion; after all, this is the thought process we learn in school. However, veteran traders know that markets move to their own rhythm and that you can often throw the fundamentals out the door, especially in the short-term.
Here’s an analogy. We are in the late stages of a worldwide debt crisis- none of us would disagree with that. Perpetual gold and silver bugs will point to the fundamentals of: a) too much debt, b) the dollar being a fiat currency, and c) the printing of money, as ironclad proof that gold should be rallying right here, right now. But here’s the thing: these same fundamentals were there during the 1980′s and 1990′s when gold collapsed from $850 to under $300. Why didn’t we see an economic implosion back then? The Hunt brothers and many intelligent people thought the end was near in the late 1970′s and early 1980′s. They had the fundamentals right, but they ended up being dead wrong when it came to timing. This is the trap you should try to avoid. The fundamentals are useful as a backdrop, but you still must consider things like long-term cycles and price action.
Certain price points are always going to attract the most volatility, especially if it is a long-term level of support or resistance. As it pertains to gold, the all-time highs of $850 in 1980 served as a long-term level of resistance. In 2009, gold paused its steady uptrend and fluctuated above and below $850. Gold needed multiple tests of $850 before rallying explosively to new all-time highs.
The price level that will be the launching pad to $2,000 and above is $1,800. Gold’s had 5 failed attempts at breaking out above $1,800. In bull markets, the more times a level is tested, the more likely it is that the level will eventually be taken out. A lot of technical analysts will look at the gold chart and say that $1,800 is resistance and multiple failed breakout attempts imply that gold is losing strength. They are wrong. This is a bull market and that’s the most important thing to remember. After all, every single “triple top” or “head and shoulder” pattern has been violated to the upside thus far with gold.
At this point it’s all about patience and the steady accumulation of gold at what will end up being cheap prices. Gold’s day will come, and it appears more likely it will be some time in 2013.Follow