Tall Black Candlestick Breaks the Back of the Gold Rush

Tall Black Candlestick Breaks the Back of the Gold Rush

Bang the Drum for Gold, boys. Oh, how the bullish beat for Gold goes on! Only this past Monday, June 28, a prominent investment writer pronounced the very high likelihood that the price of Gold will top $3,000 per ounce and possibly will climb to $5,000 within 2 years. All kinds of "fundamental reasons why" Gold must advance to those levels are constantly bruited about. It all sounds perfectly rational logical and perhaps it is. The problem is that logic has nothing to do with it, while a changing social mood has everything to do with it; and social mood is not rational, it is not irrational, it is simply unrational; and it is in control. The curtain to an inspection of changed social mood has been pulled back by the tall black Candlestick which appeared in the Daily chart of Gold prices on July 1, 2010.

It is essential to understand, first of all, that the long rise in Gold prices since October 2008 has been an upward correction, a countertrend move. All corrections eventually come to an end. An upward correction ends with a price top, from which prices reverse to the downside; and when the downside is complete, prices will be at a level which is lower than they were at the time the upward correction began, which in this case was October 2008, when Gold was at about $680 per ounce.

Gold topped on Monday, June 21. Precisely one week later, on June 28, the SPDR Gold Trust topped, on the same day that the above-mentioned pronunciamento appeared in print. Its timing was exquisite, for on the following Thursday, July 1, Gold prices fell $44 per ounce, as depicted by a tall black Candlestick price bar; and all of the paper gains since May 5 were erased in a single day. The "fundamental reasons" for a continuation of price advances in Gold were swept aside by a changed social mood which simply nullified them.

Much of the race into Gold probably has been induced by a fear of oncoming inflation. However, it is deflation, not inflation, which is stalking our economy now. All of the bailouts and other pump-priming has not served to revive, or inflate, the economy; rather, those programs have served (up to now) merely to stave off a rapid advance of deflation. However, the pump-priming programs are ending or have ended; and it is doubtful that Congress would be of a mind to add to the national debt load at this time by the creation of similar additional devices.

It should be borne in mind that, in a deflation, the prices of goods and services fall; and that specifically includes the prices of Gold and of Silver. They are not immune. Just about the only asset whose value increases during deflation is Cash.

The tall black Candlestick on July 1 was a wake-up call. It appears highly likely that the Gold Rush is over, and that prices of Gold and of Silver will be trending substantially lower during the ensuing months.

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