Bloomberg News

Gold May Slide Before Extending Bull Rally: Technical Analysis

September 12, 2011

Sept. 12 (Bloomberg) -- Gold may decline to below $1,700 an ounce this month before climbing to an all-time high of $2,000 in October as the metal extends its longest rally in at least nine decades, according to technical analysts.

Gold’s jump to a record $1,921.15 an ounce on Sept. 6 pushed it to “overbought” levels and the metal may slide to $1,670 before October, said Ron William, a technical strategist at MIG Bank. Any slump may halt at $1,650 and the metal may touch $2,000 next month, Commerzbank AG said, while independent analyst Jim Stellakis sees prices staying between $1,725 and the all-time high in the coming weeks.

Bullion is set for an 11th straight annual gain, the longest winning streak since at least 1920 in London, as concern about slowing economic growth spurred investors to diversify away from equities and some currencies. Gold’s swings in the past month prompted CME Group Inc. to raise margins on Comex futures contracts, while the metal’s 10-day historical volatility is more than double the average so far this year, Bloomberg data show.

“Gold is an overcrowded trade at the moment going into the $2,000 psychological barrier,” MIG’s William said by phone from Neuchatel, Switzerland. “Such a decline would be consistent with gold’s long-term bullish cycle and provide a fantastic buying opportunity into 2012.”

Immediate-delivery gold traded at $1,845 an ounce by 3:45 p.m. in London on Sept. 9, and is up 30 percent this year, outperforming global stocks, commodities and Treasuries.

Exhausted Momentum

Prices slumped as much as 11 percent in three days after touching a then-record $1,913.50 on Aug. 23 after Tom DeMark’s TD Sequential indicator suggested price momentum had been exhausted, said William. The metal may drop as far as $1,670, which would be the ceiling of a long-term logarithmic chart, he said. Still, a sustained close above $1,934 would reduce the bullish signal, he said, referring to the DeMark strategy.

Gold has dropped on average as much as 28 percent in “large” setbacks over the past decade or so, and continued its bull run, said William. A drop of that much from its record would be about $1,383.

DeMark indicators, named after Tom DeMark who came up with the concept, are designed to identify market tops and bottoms and anticipate reversals. In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index. More people may be turning to charts to help them trade. The Society of Technical Analysts in July said its membership jumped 60 percent since June 2002.

Overbought

Gold may be overbought according to tools including moving average convergence/divergence and stochastic oscillator indicators, said Stellakis, founder of Technical Alpha, a New York-based research company. While any extended drop may push prices to $1,615, which would be about half of the dollar- measured move from January through the Aug. 23 peak, projected down from the record, that wouldn’t mean the bull run is over, he said.

“Over the last couple of months this uptrend has accelerated,” Stellakis said. Based on performance since 2009, prices need to stay above $1,500 for that trend to stay intact, while the metal needs to trade above $1,620 for the accelerated uptrend since July 2010 to continue, he said.

Gold may climb to the “psychological” level of $2,000 next month, said Axel Rudolph, a technical strategist at Commerzbank in London. Any decline would be supported near the Aug. 25 low of about $1,704 and then $1,650, which may be where the 55-day moving average would be, he said. Gold will continue its bull run as long as prices stay above the July low of about $1,478, he said.

“We’ll have another crisis,” Rudolph said. “I believe gold will still be a very heavily demanded safe-haven trade.”

--Editors: Sharon Lindores, Dan Weeks

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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