The gold price could be preparing its flight

The summer is there, time for a well deserved holiday. Most people booked their flight … but what about the gold price ? It could be it is preparing its flight as well.

We read on an interesting article, concluding that gold could be setting up for a major move. Based on technical analysis, the author showed that the gold price is on a critical juncture. As we are in secural bull market, the technical indicators should be signaling a powerful move up (not down).

One of the most respected newsletter writers on this planet, Richard Russel, published a similar conclusion earlier this week. His opinion was based on a more general view, being the stock market evolution. In a piece that was published on King World News, he admits that he does not believe the gold bull market is over. He rather thinks that we are moving towards the third and most powerful phase of the bull market. This is what he had to say:

“I believe the gold bull market is still intact.  If gold cannot make a new high in the year 2012, be prepared to hear the anti-gold element scream to high heaven that the gold bull market is over.  They will be wrong.  We still have not seen the third speculative phase of the gold bull market, but that phase lies ahead.”

Now let’s try to find a clue in one of the gold charts, which confirms the views of both men. We believe that the gold price is not the ideal chart to look at, because we think the price is not necessarily reflecting (fundamental) value … at least in the short run. As all markets are driven by psychology, we believe the gold sentiment could be one of the most relevant charts for this purpose. Below you see the gold sentiment index; it’s drawn with the black line on the upper part of the chart (courtesy: Goldchartsrus).

All powerful bull markets go through three distinct phases, ending in the third phase which is characterized by a mania. When applying those phases to today’s gold bull market, we could come to the conclusion that phase I started somewhere in 2001 and lasted till 2007. We saw a severe correction in 2008, marking the start of phase II. You could see on the chart that the correction was marked by a decrease in the gold sentiment index, to such an extent that the sentiment went temporarily below the gold price.

Are we experiencing now the end of phase II ? Is today’s correction preparing the start of phase III ? It’s impossible to say at this point in time. But looking at the gold sentiment chart, a plausible assumption could be that a plunge of the gold sentiment index below the gold price is marking the transition of one bull market’s phase to another one. Only time will tell if that assumption is correct.

There are enough signs on the horizon though that the current correction in the gold price could be over soon, as monetary stimulus is high on the agenda’s of most governments worldwide. That, of course, is extremely bullish for the gold price. Clearly, governments are working hard to prevent a deflationary wave like we saw in 2008, and monetary aid is the only weapon they are willing to use. At the same time, we see incredible support between $1,500 and $1,550, mainly from physical demand coming from China and the Central banks. Is it time for the gold price to prepare its flight ?


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