HardAssetsInvestor

Written by Sumit Roy  |

December 28, 2011

Precious Metals Monitor: History Says Gold Could Fall To $1268

Details

Gold hovers above key technical levels, with a breakdown leading to potentially much lower prices.

Gold is under pressure after failing to attract much interest from buyers above $1600/oz last week. A resumption of the recent uptrend in the U.S. dollar is adding to the metal’s burden.

As of this writing, gold has fallen as low as $1557/oz today. That puts it below the recent low of $1561 set two weeks ago. All eyes are now on the $1532 level, which is the intraday low set back in September.

Importantly, that support level also corresponds with an upward trend line that extends all the way back to 2008, when gold resumed its uptrend following a large correction amid the financial crisis that year.

A break of $1532 would thus be interpreted as extremely bearish from a technical perspective and would likely lead to a wave of selling, opening up the potential for much lower prices.

Silver is facing a similar situation. The September intraday low near $26 corresponds with a three-year upward trendline. A breakdown below that level could lead to a quick move toward $20.

A market that has risen for 11 years straight is bound to see significant corrections. From September’s peak of $1921.15 to the $1532 trough of the same month, gold prices had fallen 20.2 percent. Over the past five years, there have been two corrections of similar or larger size.

In 2006, prices fell from $730 to $542, or 26 percent. Then in 2008, the metal fell from $1033 to $682, or 34 percent.

If gold were to fall 34 percent from its $1921 peak, prices would reach $1268. Yet while that would be jarring to many investors, it would not necessarily signal the end of the yellow metal’s bull market, just as the correction in 2008 was simply a pause in the larger uptrend.

That being said, investors would obviously benefit from entering positions at lower prices. And aggressive traders could even profit from shorting gold in the event that prices decline further from here.

As of this writing, the U.S. Dollar Index reached as high as 80.61 today, just shy of the 11-month high at 80.73 set two weeks ago. The EUR/USD exchange rate fell as low as 1.2912, which is a fresh 11-month low.