Gold Tops 1260
Gold broke a new record high of $1260, taking out its previous high of $1250 in December. This area is considered a key pivot point for a number of reasons. Investors must now decide if they want to buy in hopes of a decisive breakout, or wait for a correction.
The initial spike to $1250 was propagated after India made a surprise move to buy half of the IMF's gold for sale in November for around $1040 per ounce. China was thought to be the most likely buyer of that gold, and news brought in panic buying from both institutions and individuals. When gold reached $1250 on a buying frenzy in December, Chinese officials announced that it was overpriced, and gold has since proceeded to correct.
The correction caught some institutions off guard such as Hedge Fund manager John Paulson who saw a 14% loss in the first month of his newly launched gold fund. But the correction didn't last long, and wasn't very deep. The $1040 level has held strongly, and it is increasingly looking like Marc Faber could have been right once again when he declared that gold would never trade under $1000 again. Even small dips in the metal are attracting buyers now institutional who may have missed lower prices and are taking every opportunity they can to accumulate. The result has been shorter and shallower dips. Should this area of resistance be broken to the upside, gains will soon be measured in hundreds of dollars rather than tens. Jim Sinclair has been $1 million on a breakout of gold to $1650 by early 2011. While it seems a far reaching target for 6 months, a breakout in gold now would increase the odds substantially.
While some analysts argue that this breakout is imminent, others are more cautious. Summer is the weak season for gold, and has been known to have sudden downward spikes. Also, gold has traded upwards largely on the backs of European buyers exiting the Euro. In Euro terms, gold is very extended and could be due for a correction. Another reason for caution is the divergence between gold and other precious metals. Silver is still struggling to regain its peak of $21 in 2008. Platinum is far from its highs. In addition, many gold and silver miners are far below their 2008 highs, even though gold is much higher. These non-confirmations are a warning signal that instead of breaking out, gold could be in the process of double topping.
Falling stock prices and a slowing economy could cause the metals to correct, but even if a double top occurs and gold heads back down, it could all be part of an extended cup and handle pattern leading to a larger breakout towards the end of the year. It now appears to be only a matter of time.