The fundamentals for gold remain as bullish as ever, however after rising more than 30% since the beginning of July the yellow metal is likely due for a correction, and thanks to a potentially bearish technical setup we could see prices fall as far as $1,575 an ounce.
On 6 September the price of gold made a new all-time high of $1,923.70 just above its previous high of $1,917.90 made just two weeks before. This move has traced out a potentially bearish Double Top Reversal pattern. As its name implies, this pattern is made up of two consecutive peaks that are roughly equal, with a moderate trough in-between (blue lines). The pattern is completed only when support at the lowest point between the peaks is broken (upper circle).
Should the Double Top complete gold could correct as far as its 150-day moving average (lower circle) which has acted as long-term support. This scenario would give gold a downside target of around $1,575 – $1,600.
It’s worth noting however that this is not quite a perfect Double Top Reversal pattern, since the peaks should be separated by about a month, and in the case of gold they are separated by just two weeks. It’s possible therefore that this price behaviour represents normal resistance rather than a lasting change in the fundamental supply/ demand situation.
Regardless of how a correction might unfold, it should be stressed that a price decline of this magnitude would not alter the long-term prospects for gold which is in the eleventh year of a major bull market. In fact, a decent pullback would flush out many of the weak hands and would set the scene for the next leg up.