Since the all-time highs at near $2,070 reached in August 2020, gold prices have been falling almost relentlessly for nearly 8 months. Then, on March 31 gold jumped decisively after revisiting the lows of March 8, near $1,678.
In this post I analyze why the gold market went down for so long, and discuss whether the potential double bottom in March 2021 heralds the end of the eight-month correction. I'm using the word potential because strictly speaking a double bottom should not be considered as such until the last wave of the w-shaped pattern breaks the preceding high.
Why such a Persistent and Unexpected Correction
There has been a lot of talk about crypto currencies in general, and bitcoin in particular, draining buying power from gold and other metals. It does not seem a convincing argument to me, at least not sustainable for a long period of time. Here are the reasons:
- At his stage it is hard to determine whether there is enough liquidity or not to push prices higher for a set of asset classes. Investors can hold cash for a while, waiting on the sidelines but ready to jump in and buy the most oversold assets.
- While young investors are currently into all sorts of crypto currencies, some institutional investors are diving into this space for the first time. But the key is whether this sentiment is going to boom or bust at any point in time. Crypto investor sentiment is as volatile as crypto prices themselves.
Double Bottom in Gold Prices unfolding
The lows of March 8, 2021 at $1,868 have been revisited on March 31. following—coincidentally or not—the Archegos fund chaos at the end of March. As for now the strong rebound from this level suggests a double bottom is in progress.
Managing support levels is tricky. False breakouts as well as short-lived rebounds are endemic nightmares for traders across the board. However, one can find small details that shed more light on the picture. The detail in our case can be described as follows: Whenever the rebound from the second low of a double bottom displays an unexpected and powerful rally, chances are that the downtrend has come to an end.
A 20% correction in gold for almost 8 months may seem a big deal, but the reality is that commodities have always been highly volatile assets. Hence the long term bull market of gold might be still alive. Up until now the decline from August, 2020 could be considered as a pronounced correction rather than the start of a secular bear market.
If the metal gains upside momentum after this discussed initial spike, gold prices may head higher and even exceed by far the previous all-time highs. A loss of confidence in the dollar would drive gold prices much higher, over $11,000 according to Jim Rickards