Saturday, January 29, 2011

An article from Paul Schatz

Paul is a top notch analyst, money manager and friend. All opinions expressed in his articles are his, and do not reflect any recommendations to buy or sell securities, options, currencies, futures or any other financial instrument not specifically mentioned.

Gold Ready for Another Run

As I mentioned in my 2011 forecast, after two fantastic years for gold, I expect 2011to be more of a digestion or consolidation year with a wide and very volatile trading range. I believe we will see $1500 at some point as well as a $100 down day during the year. When all is said and done, I think gold is going to finish 2011 with modest gains, best case scenario.

Several people have questioned why I don’t think gold has seen its bull market peak yet. As I mentioned in last week’s edition, commodities tend to see inverted “V” tops and long rounded bottoms. That’s exactly the opposite of the behavior we usually see in stocks. As a particular commodity gains steam and acceptance, it usually melts up in parabolic fashion.

The chart below shows where gold is today. IF the rally was terminal, it would have blown off to the upside (straight up) and then begin to go straight down. We’re not seeing that right now. It’s a sideways (trading range) that should eventually resolve itself to the upside.

On the far right of the chart below and the next one, you can see the two possible scenarios for gold in the short-term. I think the shiny metal either continues lower into February towards $1300 and then rallies. Or, we see a quick rally now and then another selloff next month before rallying. Either way, I believe the ultimate resolution to this range is a move back to the upper end.

I want to go back to offer examples of how gold behaves near peaks as I discussed above. Before the last rally you can see in the chart above, gold looked a lot like it does right now.

And before that, below, you can see another example of how digestion and consolidation led to another major rally.

Don’t get me wrong. This is not infallible, but it does have some solid support behind it. The hardest part is judging what’s going on in real time, not hindsight. Many times, the initial top looks like an inverted “V”, but never gets going to the downside or stops going down and begins to enter the digestion.

Case in point on the chart above was the peak you see on the far left side that has the makings of an inverted “V”. I remember turning negative on gold around $990 as I thought a major top was forming. Several months later after the bears tried and tried to make headway without success, the pattern certainly had changed to that of digestion and consolidation and I slowly went to neutral and then positive.

FYI, I will be on CNBC's The Call on February 1 at 11:05am.

Feel free to email me with any questions or comments at or follow me on Facebook at and on Twitter at Paul_Schatz.

Until next time…

Paul Schatz

Heritage Capital LLC

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