I read yesterday and commented on an article by Barry Ritholtz about the shiny metal’s outlook. I was surprised to notice that it attracted such interest with 148 comments so far. I’m not surprised though of the prevailing thought process that gold is somehow different from other asset classes like stocks or real estate. I guess everyone agrees that stocks do sometimes go down and there have been decades-long bear markets, but few would say that this applies to gold as well. I’m not going to go through all the arguments of the gold bugs of why the gold chart only has a BUY button . I’m just going to take a look at the technical picture:
It appears that the risk/reward ratio is heavily skewed to the long side. You would risk around $30 hoping to make at least 20 times as much if gold goes back to its former highs. But let’s take a look at the silver chart as well. These two metals are highly correlated:
We can see that the triple bottom formation similar to the one in gold has already been invalidated here. All of a sudden, the long scenario doesn’t seem that appealing anymore.
What I think we have in gold is a bear flag, which is a continuation pattern. If confirmed, it would give a technical target in the $600-$800 range and a time frame for this to happen of 9-12 months.
Just remember, people are often wrong in their opinions, but markets never are. That means that what the market does is what actually counts, not what people think or hope it will do.