Any Gold Bulls Left?

That is a good question to ask, given the past several weeks and months of a grinding decline in gold, and major new lows in gold stock indices. The XAU HAS taken out the low made in the summer of 1998, and interestingly gold has NOT taken out the low made last September at the $252 level. I was certainly wrong earlier this year in that I thought the XAU would not make a new low, and in how long the process would go on. And I have asked myself the question over the past few weeks as to whether I should change my outlook? The following are the results of that "questioning process".

The most important assumption that I believe is still correct, is that gold last year rallied in a Bullish 5-wave structure from the September low at 252, to the October high at $339. Initial pullbacks off 20 year Bear Market bottoms very often retrace 62% to as much as 89% of that initial rally. So far the retracement is about 80%. And very importantly the Ewave structure since the October high of last year is a clearly corrective pattern off those highs. And technicals are now very oversold, with recent lows for the year in gold showing significantly higher momentum readings basis daily-weekly-monthly oscillators. And sentiment continues at extreme levels of negativity, with more and more of the remaining die hard Bulls giving up. And gold also continues to trace out a classic and massive Head & Shoulders bottoming formation, that began in January of 1998 with the left shoulder, and appears to be in the completion stage of the "right shoulder" at the present time. This is also an excellent example of a "saucer" or "rounding bottom" technical formation.

None of this Ewave or technical data in gold "guarantees" anything. I can only state that in my opinion this is as Bullish a set up that one can have in regards to any market. The only real caveat I have is that this final stage in gold could still grind on through year end or into January. However, ALL downside parameters have now been satisfied so we could see a big rally begin at any time.

The XAU action is also very interesting and important. In hindsight the rally form the September 1998 low at 48.67, to the 92.72 high last October was a clearly a corrective pattern. And from last October's high at 92.72, we have seen what clearly looks to be a diagonal triangle 5th wave pattern. Diagonal triangles to the downside are a series of declines and ensuing rallies which "overlap" the low of each previous downleg. They indicate decreasing downside momentum, very choppy trading, that finally exhausts all selling as well as almost all remaining Bulls (sound familiar), putting in a final low. And that low is most often not too far below the previous major bottom low, in our case the September 1998 low at 48.67. And I will be the first to point out that pinpointing the final low in this pattern is often an exercise in futility. One simply accumulates gold stocks they like into weakness when the final stages are likely upon us, as they certainly appear to be now. And just like in gold, we could see the XAU grind to the low 40s (my worst case scenario) before a final low is seen, and that process could last to year end. Also, once a diagonal triangle ends, the reversal is dramatic and violent - as the market moves rather quickly back to where the diagonal began. In our case that would take the XAU back to the 1992 level, an easy double from Fridays close.

So let me sum it up. In my work the XAU is very likely within 10% (worst case) of a final bottom. And the high confidence scenario calls for a rally back to the 1992 level at a minimum, a double. Gold has likely already bottomed long term, and looks to be completing a high confidence bullish technical formation, as well as a major corrective Ewave pattern. A market sector probably cannot be hated and forgotten more than this one, another likely piece of evidence of a major long term bottom. And I can now say that ALL downside parameters for a long term low have been met. And with a likely Bear Market underway in the stock market, that is also when a major shift from paper assets (stocks) to hard assets (gold) begins. You may have to suffer through at worse another two to three months of grinding action.But with downside risk in gold stocks and gold very limited in my view, does risk/reward get any better than this? We'll find out in the weeks and months ahead.