Gold Continues to Struggle

 | Sep 30, 2013 | 9:00 AM EDT
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Gold! Some investors love it. Some hate it. Either way, it always manages to make headlines. Gold was higher on Friday. December gold futures, the most actively-traded contract, rose $15.20 an ounce. They closed at $1,339.20.

With the budget deal, or lack thereof, looming, the risk of increased volatility in gold looms. While many bulls have already placed their bets, this precious metal continues to show signs of a struggle. More than a week ago I offered my take on some of the technical concerns regarding the future of gold. Those concerns are even greater today.

The head and shoulders reversal pattern I speculated about on the daily time frame is now becoming a reality. It began with the July rally, followed by the development of the left shoulder into August that broke to the highs, and hence the "head" of this pattern. After pulling back into September, gold has held tight to its daily support zone from the congestion of the left shoulder. This has developed into the right shoulder for this bearish pattern.

Despite strength immediately after the Fed announcement earlier this month and after striking this daily support, gold has returned to the congestion from late July and early August. Further attempts to pull higher have been limited to short bursts of intraday strength.

As we head into the final quarter of 2013, I think that we will once again see the downward pressure on gold resume. While it may take another week for the daily head and shoulders to trigger, the odds are high that it will do so. Just an initial drop out of the shoulder can easily return it to the lows from early July.

As we head into the new week, I am monitoring the 30-to-90 minute charts for a short strategy to unfold. My target on the SPDR Gold Trust (GLD) is at least down to $120 over the next three weeks. This corresponds to about $1,250 in the spot mark SPet.

Mining stocks have had an even more difficult time than gold over the past two years. The Market Vectors Gold Miners ETF (GDX) can easily retest the 2008 lows before the year's end, although its daily downside continuation pattern is not as well-developed as in gold itself.

My outlook on gold is neither new, nor unique. While the gold bugs may have popped up in recent trade, a number of investment banks have issued their own warnings for the year ahead. Goldman Sachs, for example, has taken a bearish stance into 2014, while Bank of America Merrill Lynch came out on Friday with a statement that it "anticipates sustained headwinds to gold prices." Citigroup and Morgan Stanley also spoke out earlier in the week.

The 2014 forecasts from the firms listed above also fall primarily in the ball park of $1,250 an ounce. Some analysts, however, are suspecting as low as $1,000 in the near future.

I don't think we will have to wait until 2014 to see a return to $1,250, or even somewhat lower as that decent plays out. Based on current price action, I would consider $1,000 unlikely in the near term without another weekly correction off lows.

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