Gold vs. the Bear Market; Will it End Happily Ever After?

 price of goldIn the classic nursery tale “Goldilocks and the Three Bears,” first put in written form by British author Robert Southey, Goldilocks ran when she came face to face with the bears. On the price charts, gold is also now facing a bear market; but will gold also run away and tank?

Looking at the chart of the June gold, the picture is extremely bearish following the recent break below $1,600 and the subsequent failure to hold at $1,550. In fact, it has been a big and steady decline since trading at a record contract high of $1,928.30 on September 6, 2011, and just below $1,800 in late February. With the decline, the June gold currently sits at 20.33% below its September price and officially in a bear market and trend reversal.

Gold failed to hold on to its base with support at $1,620 and has broken lower. Now the key is to watch if gold can hold at $1,500 to $1,525 on the extreme oversold technical condition.

The June gold is below its 200-day moving average (MA) of $1,701 and 50-day MA of $1,648. There is a bearish death cross on the chart, so there could be more weakness.

The threat now is the 11-year streak, as gold is down nearly two percent this year.

While gold is in a technical bear market, I’m not ready to give up, but then I would also be more careful in adding gold positions whether in physical gold or gold-based stocks. The reality is that the current technical picture is bearish and void of any buying interest.

The downside break at the base support was bearish. Recently, I suggested that a “further decline to $1,550 would represent an excellent buying opportunity for the metal.”

We are at that juncture and I’m not sure I would pull the trigger at this point, fearing there could likely be more downside risk ahead. The extremely weak Relative Strength will place a drag on prices. A break below the 13-week low of $1,526.70 would be bearish. A further move down to $1,511 if gold fails to attract any buying support could be in the works, with a breach of $1,500 a realistic possibility. We could soon see $1,400 gold again, last encountered in June 2011.

Looking at it from another angle, the fixed exchange rate between gold and silver was 15.5:1 in the 19th century, but it moved much higher to average 47:1 in the 20th century. The spot gold price was $1,549 on May 16, compared to $27.84 for spot silver. This equates to a current gold-silver ratio of 55.63, which means the price of gold could fall further to the average—implying a gold price of $1,308, down another 15.56%. Of course, silver prices could be undervalued based on this ratio and head higher.

On the plus, if the June gold can hold at its 52-week low of $1,482.50, we could see a rally based on what I view continues to be above average global risk, which I discussed in Global Market Risk: Is it Improving?

Given the current downward pressure, my advice is to adopt a wait-and-see approach.