Warning: Possible Head Fake Breakout in Gold and the GLD


by John Galt
June 4, 2012 05:00 ET

Almost a month ago on May 6th, I warned of bad things from the financial world in this article:


Gold is Sending a Dire Economic Warning


Thus far that warning has been spot on but the recent action in the gold markets on Thursday and Friday of last week has suddenly given my fellow goldbugs the “hopium” that a bottom is in. I must argue to the contrary as the technicals are still horrid and not enough work has been completed to the downside.


For purposes of this discussion, I shall use the GLD the paper ETF proxy for gold to explain. This chart really says almost everything I wish to express this morning:


A few points of interest from the chart and then some:


1.  The markets failed to cross and hold the 50 day moving average (DMA) but that is not the larger issue.


2. The moves heralded by some to create a “bottom” call was made on very low volume and relative to recent drops in the markets, substandard to what is needed to confirm a new bull phase or return to the old move is underway.


3. Despite the tremendous amount of fear worldwide, gold is being sold into these rallies to raise cash for margin calls and in some cases, governments to continue functioning.


The gold chart pretty much says the same thing as the GLD above:


The bottom line is simple:


Gold must close above the $1670 level with heavy volume and the GLD above 165ish with the same heavy volume to confirm the bottom. In the interim, this market appears to be retracing the 1979-1980 time period almost exactly, which means after a true bottom or consolidation occurs at lower prices, gold will be set up for a tripling in price or greater move depending on geopolitical and economic conditions.


Keep your powder dry and shop wisely because when it breaks the 50 DMA with volume, it will move up in price in a parabolic fashion!


Update 15:30 ET 6/4:


Gold has been flat to slightly down all day indicating that indeed, it does appear to be fishing for support around the $1620 level. A failure to hold this area with a declining 50 DMA is not a positive however as volume projected to close at or a tad above average. Unless some news event or threat of Fed action sparks a move soon, it should start to roll over late this week or early next week.


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