by Greg Guenthner, Daily Reckoning
Gold’s counter-trend rally is quickly falling apart.
The summer gold rally that began in late June ended overnight as the metal plunged below $1,350. As of early this morning, gold is off $32, resting near its recent lows at $1,330. September — a month that is usually very good for gold — has not been kind to the yellow metal so far…
Click on chart for larger image.
I’ve remained skeptical of gold’s summer rally since it failed to top its June highs near $1,425 last month. This price was crucial for gold since it marked the consolidation area after the big dump back in April- May. When it rolled over after briefly topping $1,425 just a few weeks ago, it became clear that lower prices were on the way. Now that the counter-trend rally is broken, I suspect gold will make a quick break toward $1,200 and its 2013 lows.
Keep in mind that gold continues to break down from a massive, secular bull market that lasted more than a decade. While these counter-trend rallies are great for traders, they also act as opportunities for trapped longs to unwind their positions.
Many traders and investors have insisted for weeks that the June lows would become a major turning point for gold. Some even said it was the beginning of another major push toward new highs. This was simply wishful thinking.
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Earlier Report from 04 September
If you have been following gold’s bumpy ride this year, two simple charts will tell you everything you need to know about the yellow metal’s prospects.
Gold futures were sinking as this was written. The price has dropped about $18 off yesterday’s highs. That puts gold just below $1,395. For the past five trading sessions, gold has slowly trended lower. It’s consolidating just below $1,425. So if you’re a fan of the rally off its July lows, you should be encouraged by this action.
At this point (04 September), gold was approaching an important trading zone. If it successfully penetrates $1,425, all of the damage it has endured since mid-May will be repaired.
This zone between $1,425 – $1,475 won’t be easy to leave behind. Remember, this is same area that contained the meat of gold’s major drawdown back in April. If long-term bullish buyers really are in control, they will need to make their presence felt if gold has any chance at all at $1,475…
However, if you want to truly understand how important this trading zone has become for gold, you have to view gold’s entire bull market over the past decade…
Gold lost the mammoth uptrend that guided it to gains since 2002. Now, gold is approaching a point where it could attempt to challenge its 50-period moving average. If it fails again near $1,450, I expect the metal to continue its downtrend, ultimately landing somewhere between $1,100-$1,000. That would allow a complete retracement of 2010-2011 push toward $2,000.
I’ve spent a lot of time talking about the stock market’s potential make-or-break moments lately. But gold is now getting to the point where a couple of trading weeks in either direction could ultimately decide its fate. If gold fails here, expect another leg lower toward my ultimate price target.
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