|I hope this won't come as a surprise to you, but it should be clear even to gold bugs that the yellow metal has been in a speculative bubble that started in 2001. Whenever an asset class rises from $250 to more than $1,000 in just a few short years, that is the mark of a bubble, akin to the fabled tulip stocks long ago and the technology stocks in 2000. Well, the gold bubble has burst.|
|If you study the history of market bubbles across multiple asset classes, you may note that the majority of those assets retreat approximately 90% of their gain since the bubble's beginning. That would indicate an eventual retreat of gold to around $325. This, however, will likely take a few years to come to pass, if ever.|
|In the meantime, let's focus on potential price targets that could happen over the next few months. Looking at Figure 1, you will see that I have drawn the three primary Fibonacci retracement levels on the chart. I used the 2001 bottom to this year's peak price.|
|FIGURE 1: GLD, WEEKLY. Note the three primary Fibonacci retracement levels.|
|Graphic provided by: Wealth-Lab.|
|While Fibonacci levels are significant by themselves, you'll notice that each major level also corresponds closely to a significant technical resistance level. I have circled those resistance levels on the chart. The 2006 price peak, marked in red, now acts as support and is very close to the 38.2% retracement level. The 2006 price lows, circled in blue (but also earlier in the year), correspond to the 61.8% retracement level. Finally, the lower prices from the period of price congestion from 2007 (brown oval) match closely to the 50% retracement level. In the same vein, if you take 161.8% of the price movement between the March 2008 top and the May 2008 price low, you will find that it indicates a price target of almost $730. The 161.8% figure is a Fibonacci value that can be used to calculate price targets. And, of course, the $730 value is almost identical to the 38.2% retracement level mentioned earlier.|
|Given the bursting of this bubble, I think it is likely that gold will eventually move to at least the $550 level, but first it will have some very strong support along the way at $730 and $640. Look for these to be significant price levels that gold must hold to have any chance of eventually moving back up above the $1,000 level.|
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