This past week, I was on CNBC World and they asked me where I thought gold was going from here.
I told them that there was a technical pattern that gave me my target of where I felt gold was going.
You see, gold traded in a rectangle pattern between $1,520 and $1,800 for over a year and a half. When a long-term pattern like that breaks out, it tends to have a volatile directional move. When it breaks out, how far can it go? Well, we know how far it should "minimally" go by the minimum price targets that come from chart patterns like the rectangle pattern.
The minimum price target on a pattern like this is obtained by measuring the depth of the pattern and using that as the measuring stick from the point of breakout.
The width ($1,800 - $1,520 = $280) is 280 points wide. You subtract that from the point of breakout ($1,520 - $280 = $1,240) as a minimum price target. Since $1,240 is the price target, I know that it should end up trading down into the $1,200 to $1,250 area. So that's the range that I gave CNBC that night.
However, when they asked, "Could it go to $1,000 an ounce?" I said sure it could. Why? The chart patterns give minimum targets, not maximum targets. And when any asset begins to fall, there's a lot more emotion behind that than the climb upward in an asset. And along with that emotion comes investors being irrational, which can take any asset (including gold) lower for now.
However, I told them that once this correction finally shook out, I saw gold heading back to the $1,500 area over time. Here's why:
1) All of the "weak hands" will be shaken out of the trade by then. That's mostly people who bought gold exchange-traded funds, etc. and aren't as seasoned in trading gold or as convinced of why they should be in it. (Physical gold purchasers have held strong. Coins are being sold out right and left. Central banks are buying more gold, etc.)
2) The dollar finally reached the top area of its major downtrend line that has held since 2005. Upon reaching that, the dollar turned south and fell for the next four weeks in a row.
Sure, last week, the dollar got a bounce, as could happen with any asset that's fallen for four weeks in a row. And we could see the buck rise for another week or two before it's all said and done.
But from this point on, I believe the dollar has peaked out once again in its overall bear market and is ready for its next cycle lower.
Remember, the government wants to pay back future debt in cheaper dollars, not more expensive dollars. (And they are racking up debt at a serious clip.)
Secondly, they want inflation, not deflation. Federal Reserve Chairman Ben Bernanke reiterated that last week at his Q&A session after the Fed's monetary policy meeting. Central banks fear deflation, but they don't fear some inflation.
Well, if the dollar were to rise for too long, we'd see deflation and not inflation. Right now, inflation is at 1.4 percent (at least according to the reported consumer price index numbers. You and I know in real life these increases are much more than this.)
The rise of the dollar over the past two years helped bring the CPI down from 2.2 percent to 1.1 percent on an annualized basis. Now it's back up to 1.4 percent, but the dollar has likely topped out too.
So you can bet that Bernanke will do everything within his power to ensure assets stay "inflated" rather than deflated.
That will be bad for the dollar and bullish for things like gold and silver. Silver will have an even bigger rise than gold will.
By the way, silver went through the same rectangular chart pattern as gold did. Its floor was $26 and its ceiling was $36. So the width of that pattern is 10 points.
If you take 10 from 26 you get a minimum price target for silver of $16 per ounce.
I'd say the minimum price targets for chart patterns actually meet or exceed their price targets about 80 percent of the time (just judging from experience). So they have a pretty good hit rate.
Once gold and silver finally get to what I believe are their stabilization points, I'll likely be recommending some gold and silver positions to my Ultimate Wealth Report subscribers. If you'd like to be in on it, come join us at www.ultimatewealthreport.com
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
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