The past month in the commodity markets has been a treacherous as we have seen it in recent years; and not one commodity has been spared. That said, our focus is upon gold futures given they have dropped from a high of $1,033.90 to their current level of $792.10, which is hard upon what we believe is major trend support at the sharply rising 20-month moving average. Quite simply, since, the 2001 breakout above this level - prices have returned to the 20-month on several occasions, and in each and every case this has been the proper time to be a buyer. Thus the question becomes whether this time is different...or not.
Obviously, one could very well make the bullish case as history is on one's side, with the risk as rather well-defined by a -2% breakdown below the 20-month level, which would put the stop at about $772.00. Friday's low trade for gold futures was $777.70, of which prices rallied roughly $15 off their low. Is this the requisite test of support and are higher prices forthcoming? Good questions to be sure; our only concern would be that it is different this time given the length of time prices have spent above the 50-month moving average - generally prices mean revert back to this level. Moreover, the 50%-62% retracement level consistent with bull market corrections stands at $550-$640...which is also where the 50-month crosses. Hence, one has to define one's time horizons.
In ending, we believe a short-term rally is developing to upwards of $850, but that is about as far as it goes. Of course we would reassess once our target was approached, but we would so with thoughts that an intermediate-term leg lower towards the retracement level is highly probable.
Good luck and good trading,
Richard Rhodes
