Comex Gold Sitting On Support, Which Way Will It Go: $1800 Or $1520?

Last week gold prices fell $40 on a single day. I am surprised to see gold under so much selling pressure. I had expected the opposite.

I’m not entirely sure what’s driving it. Perhaps there is some unwinding of the long-gold/short-euro trade. This is where people bet that gold will rise against the euro. This trade is no longer tempting given the relative calm that has fallen on the area – for now.

Whatever the reason, this selling pressure has not come at a good time, technically at least. We are now in an intermediate-term downtrend.

I’d like to share a chart with you that I have been working off in recent weeks. It shows gold since 2008. Let me try and explain the various things I have drawn on it.

Underneath the price I have drawn a red trend line off gold’s 2008 lows. Gold is sitting just on the trend line now, "on support." I would not like to see this trend line breached, as that would indicate that a near four-year trend is broken.

The green line is the 144-day moving average – the average price of the previous 144 days. For some reason this worked beautifully in the 2009-2011 period catching gold’s lows, as indicated by the lilac arrows. Since late 2011 it has stopped working. Gold is sitting just below it by a few dollars now. It’s a convenient place to find support.

Of late, gold has shown a tendency to make "spike lows." I have pointed these out these with the red circles. I am hoping this week’s action is typical of this. If it is, we should see a rebound as soon as today or tomorrow.

The blue and amber areas indicate the range which has bound gold over the last 15 months, as it has gone through this consolidation phase. Three times it has tried to get above $1,800 – the blue area. Three times it has failed. Three times it has tried to tested $1,520 – the amber area. Three times it has held. Sooner or later, one of the two has to give.

I would say the chances are fairly high for a reversal here and now. If gold continues this downward trend, there should be some support around $1,600. Who knows, we may have to re-test $1,520 again – trends do build momentum, particularly given that so much trading is now by computer programme – but I’m not betting on it. And I’m certainly not selling any of my gold.

Why I expect gold to hit $1,800 before $1,520
By the way, if any reader fancies a little bet: I’m happy to wager a silver ounce with the first reader who feels so inclined that $1,800 is breached before $1,520 – do it via Twitter, is best I guess. My handle is @dominicfrisby.

For gold to go through $1,520, we’re either going to need the world’s monetary and financial woes to be suddenly fixed (nah); or there really is a conspiracy to impoverish gold investors (hmm); or there's some kind of 2008 liquidity event (doubt it); or the end of the world, as supposed to have been predicted by the Mayans, does actually start to unfold (gulp).

Five times since early November large amount of gold have been dumped on the market. This is not the action of a disciplined seller trying to get the highest price for his or her gold.

Rather, it is the action of, off the top of my head, somebody who has just had a margin call. Or maybe somebody who is trying to get the price down, so he/she can buy and go long, or cover their shorts