Thinking the unthinkable about gold: Are you sure this "safe haven" isn't a bubble of its own?

Bubbles occur when something that can be bought or invested in, takes on a "must have" reputation to the point that everyone who is smart, and then just everyone, buys and buys more ... and recommends to others to buy more, and they all just keep on buying it - secure in the feeling that they are doing the right thing. All along the way, the price keeps going up, providing apparent evidence that the investment is smart. Eventually there's been so much legacy buying, that the amount of new buying simply isn't enough to keep driving the price yet higher. We saw it happen in technology stocks, in residential real estate, and even equities. Surely this cannot happen to gold, which is highly touted as the smart answer to the economic disaster we're facing. Or - can it? Have you noticed the plethora of advisors, analysts, and economic writers who recommend gold? It seems unfashionable to suggest anything different. But let's take a look at sentiment and at the chart patterns of gold itself over the years.

First, the commitments of traders (COT) data show that large and small speculators have been heavily bullish on gold for at least a year and continue to be, despite gold's inability to move higher from the highs it reached more than one year ago (in March 2008, to be specific). Correspondingly, the commercial traders who are typically considered the "smart money" have been consistently bearish on gold during this time, and continue their substantial short position. (See the first chart, below.)

The charts of gold show that gold has been having a lot of difficulty in trying to reach higher levels. I've been tracking the gold charts for many months and have concluded, based on Elliott Wave and Fibonacci analysis, that gold is more at risk of a substantial downward movement. I marked the bearish Elliott Wave view onto my daily and monthly charts of gold (see below, with my weekly chart in between). One of the essential problems in the chart is a great deal of symmetry in the waves up, both in the daily and in the monthly charts, which suggest that these movements up are not bullish impulse movements (in Elliott Wave parlance). They are more likely the types of corrective or large zigzag movements that have bearish implications. One potential level for gold to reach would be approximately $641, which would be a 50% retracement back toward the level of about $250 (the lows of the 1999-2001 time frame).

There are also other factors in the charts that support these concerns. One is simply the steep curve exhibited by the 7-year rise from 2001 to 2008. Price rises that display this type of parabolic curve tend to be unsustainable, especially once they complete a Fibonacci extension. The 1033 high of March 2008 completed a long-term 1.382 Fibonacci extension level from the first parabolic rise of the 1970's. Not a concern, you say? Look what happened to gold as it dropped, corrected and dropped more, and meandered for more than 20 years, losing more than half its value. For decades, gold was a bad investment. The simple fact that it went parabolic for 7 years doesn't mean that it cannot be a bad investment again for a similarly long, painful period of time.

Technical indicators are also a good way of discerning strength or weakness in price, because they pick up relative buying or selling pressure. While the fast-moving indicators have been fluctuating, the slower-moving indicators show there is no trend in gold right now. That means no uptrend. But gold is supposed to be starting a huge new rally upward, having moved close to where it can make a new breakout above 960, then 1007, and then the all-important 1034. If that were the case, we'd expect to see all the indicators confirming strength. That isn't showing up yet.

For any gold bugs who do want to buy the precious metal, my best recommendation would be to wait and see if it does break 960 at least, and then go in but be flexible enough to exit if it doesn't start rising fast. That's what should happen with the type of Elliott Wave, third-wave up that Tony Caldaro and others are depicting in their analyses for gold. But Tony Caldaro (whose name is by default associated with the "Elliott Wave" label here, because I like his work) also has an alternate count for gold and precious metals that's comparable to my bearish count here. For those who may be heavily invested already and unwilling to let go, you might at least consider some type of hedging along the lines of what the commercial traders are doing. Hedging one's exposure could be released if gold does mount 960 and impulse on up past 1007 and 1044. But can be important protection if gold falls under the weight of too much enthusiasm and rolls over to much lower levels.