It is a fact of trading life that patterns tend to repeat themselves in markets, and choosing to ignore technical analysis is foolish. Even hardened gold bugs will concede that the historic pattern for gold is generally a weakening in the first half of the year followed by an autumn rally. This has more to do with the timing of Indian religious festivals than hedge funds.
The gold price also presently shows signs of a double-top formation, usually a sign of trend reversal, while its inverse relation the US dollar has arguably formed a double bottom.
From the point of view of fundamentals, gold looks oversold too. In the fourth quarter UAE gold sales fell by nine per cent in tonnage, according to new figures from the World Gold Council. This is the response of jewellery sales to the surging gold price and represents a demand check to advancing prices.
IMF gold sales
We have also had an announcement from the IMF that it will be selling gold this year, which perhaps at least compensates for the problems in the South African mines where power cuts are hitting output.
But the main reason to expect gold prices to fall in the first half is that all asset prices are under pressure in the mounting global financial crisis. Hedge funds and other speculators are likely to bail out of the commodity complex as they need to raise margin funds in falling equity markets, and that will include the yellow metal.
In any case, gold has strayed along way from its 200-day moving average, and could retreat to $750 an ounce without breaking this support line. At the same time gold shares would likely take a double whammy from the plunging gold price and crashing equity markets.
But extremely wealthy gold market veteran Jim Sinclair told AME Info that he had seen this pattern in 1978 when gold shares bottomed out before they began their huge out performance up to the 1980 gold price peak. He also said that for 2008: 'Gold will move in the inverse of the US dollar after some indigestion.' Sinclair's MineSet website
is widely followed by gold investors around the world, and correctly called the bull market of the 2000s. He says gold is going to $1,650 an ounce by 2011, and counsels long-term investments in bullion and shares bought without margin funds, as gold price movements are too volatile for debt. His forecast record to date is outstanding.
However, for 2008 it looks as though gold investors might be best advised to sit out the first half of the year and look again at bullion and gold shares in the summer. That might still take courage after watching prices plunge but it would be an easier buy than after taking big losses. See also:World's richest sovereign wealth fundsBuy gold to side-step the collapsing US dollarConsiderations for gold investors, tech stocks and emerging markets