Here's a weekly chart of the price of gold for this entire bull run to date.
In 2008, gold's RSI made three sub-40 plunges. The price of gold dropped 9.3% from the low of the first plunge to the ultimate weekly low coincident with the third plunge. An equivalent further plunge, if it follows from here, puts gold at $1432. The lesson here: The gold price may have significantly further to drop.
Let's take a look at the current price chart to see how that $1432 fits into the picture.
Green Line: $1432 coincides with very strong support in the form of the 2010 high price of gold. This seems like a very reasonable target that the price of gold could achieve very quickly with the selling that would occur on the price going below recent lows ($1520), BUT...
Blue Rectangles: Gold has been trading in a range since the 2011 highs and if the lows are blown out (sub $1520), the measured target is the low $1300s. Yikes! I need to manage risk so that I don't "blow up" if that happens.
Let's go back to the 2008 situation as a pattern for a reasonably painful 2013 scenario.
Here's a closer look at the three sub-40 weekly RSI lows of 2008. For the purpose of painting a 2013 scenario, I assume that the first RSI low is equivalent to this week's RSI low.
- It took 11 weeks to go from the first sub-40 weekly RSI low to the ultimate low (targeting May 10 2013 for the 2013 lows). LESSON: The pain could go on for quite a while.
- The drop into the first and second RSI lows occurred with high volume. The final drop occurred with low volume. This week's drop occurred with reasonably high volume. LESSON: This may not be the end of the pain.
- Volume seems pretty important judging the strength of post-low RSI bounces. LESSON: Lighten bounce-related trading positions at the end of the first week without higher volume than the previous week.
- Quite a nice bounce occurs eventually. Going out to the equivalent of the end of Nov 2013 we see a 23% price rise from the first low RSI price targeting an end of Nov 2013 equivalent price of $1955/oz. If the gold bull market is intact this is not an unreasonable target.
Here's the second worst weekly RSI (after the 2008 weekly RSIs). From a Macro Economic / sentiment standpoint it seems closer to the current situation with the stock market hitting new highs after the worst of the Internet bubble crash occurring a year and a half earlier and with unemployment beginning to get better.
Gold arguably was hit in 2004 because systemic risk was deemed to be fading. That seems like the best explanation for the current gold price decline. The sentiment is that the system is no longer at risk.
In 2004, the weekly RSI low marked the 2004 price of gold low with a big run up in the price of gold occurring as inflation picked up in the second half of 2004 (look at the weekly RSI going overbought there). This seems like a likely scenario for 2013, in my opinion.
At this point, my own situation is: Don't invest like I invest. I'm pretty heavily leveraged to the price of gold (with options and junior gold producer stocks) and have taken a pretty big hit. I'm hoping to lighten on an upcoming bounce (which I think is coming) to the point where I can tolerate a gold price dive to $1432 and below and then ride out the rest of 2013 holding most of my options and junior producer gold stocks.
Best wishes to you, dear reader.