Is Gold a Bubble About to Pop? Technical Analysis Says NoThis is an interesting moment in the gold market. On the one hand, Goldman Sachs has raised its one-year target for gold to $1,650 an ounce, about $275 higher than the recent price of $1,375. Other analysts, though, believe gold is tracing out a classic speculative bubble, much like real estate did in from 2002 through 2007.

The proper starting point for technical analysis is agnosticism: Don't place any faith in either "story," but instead look to charts of price and other indicators for evidence one way or the other. It's remarkably easy to find evidence for a position you've already taken, but this "confirmation bias" can prevent you from taking advantage of technical analysis's potential to aid in making investment decisionss.

Let's start with a one-year chart of SPDR Gold (GLD), a gold exchange-traded fund (ETF) that's commonly used as a proxy for gold.

What we notice first is that gold -- at least over the past year -- has tended to advance in 3-month bursts, meander in a multi-peak topping pattern for several months, and then decline for a month or so to support levels. Then, it has resumed its long-term trend higher.

Rather than providing evidence of an expanding bubble, this chart suggests a healthy uptrend that has been repeatedly tested as it drops back to its support levels. Each time those levels held, then gold began another leg up. When the price of GLD dipped below the 50-day moving average, that signaled near-term weakness -- a slump that is further confirmed by a break in the trendline.

No Sign of a "Blow-Off Top" for Gold

The multiple peaks of the near-term topping pattern can be seen as attempts to break above resistance. This testing of resistance and bouncing off support are common characteristics of trending markets.

By contrast, in speculative bubbles, prices rise almost parabolically -- the "blow-off top" -- and then retreat to pre-bubble levels.

The five-year chart for GLD (below) doesn't display any evidence of a speculative blow-off top. Rather, it shows a modest but steady uptrend into the third quarter of 2007, at which point gold broke decisively above previous resistance and rose in a very strong uptrend into early 2008. Gold then retreated in choppy trading to its previous support level, hitting bottom around the fourth quarter of 2008, when the global financial crisis roiled the markets.

Once gold regained its 50-week moving average early in 2009, it began a solid rise that has only recently flattened out. In this longer-term chart, the May-June weakness that is so visible in the one-year chart now appears to be a minor blip in a major uptrend.

Charts cannot predict the future, but they offer some possible templates for how the future may unfold. Clearly, gold has gone though periods of range-bound consolidation lasting for a year or more, and it has also experienced significant declines that have lasted the better part of nine months. To expect gold to continue a very strong two-year uptrend without any pauses or retests of support levels is unrealistic if we base our projections on past price patterns.

On the other hand, this chart presents no obvious evidence for the idea that gold is in a speculative bubble that's destined to pop violently. If we step away from the emotion associated with gold, then we can see this chart as rather typical of a long-term uptrend, with usual retests of support levels.

Could gold drop 20%? It has done so within the past five years, so that's certainly a possibility. But even such a big decline wouldn't necessarily indicate the long-term uptrend has ended. We would need more technical evidence of a long-term reversal to reach that conclusion.

Gold vs. Silver vs. Caterpillar

Those looking for bubbles might find more compelling evidence of one in the chart of iShares Silver Trust (SLV), an ETF that tracks silver. Its steep rise from its previous resistance level around $20 certainly shares some characteristics with blow-off tops, but it also shares some similarities to gold's breakout in 2007.

As we have seen, that breakout was followed by a choppy decline back to support and then a new uptrend. If SLV were to follow this basic pattern, it could retrace all the way back to the $21 level without breaking its uptrend.

But a 50% leap in price in six months is neither a sustainable nor a risk-free trend. A healthy uptrend is marked by retests of support levels and consolidation that builds a base for the next upward leg.

If we're looking for speculative bubbles, would a stock that has quadrupled in a mere two years qualify? Take a look at the chart of global industrial stalwart Caterpillar (CAT).

If we compare GLD with CAT, gold looks like a model of stability. If there are any incipient bubbles in the market, Caterpillar and silver are much better candidates to experience a sudden pop than gold.

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With the dollar, like the schools, being dumbed down I guess some people do believe gold is going to drop like a politicians credibility.

January 12 2011 at 4:46 PM Report abuse +1 rate up rate down Reply

Thank you Mr. Smith. Someone finally wrote an article that mirrors my observations as well. I'm sure that the uninformed among us will still argue that gold is in a "bubble", but your article offers strong proof to the contrary.

January 12 2011 at 4:17 PM Report abuse +2 rate up rate down Reply

The charts don't mean anything unless and until enough holders of large positions think they do and sell out thereby creating a self-fulfilling prophesy.

January 12 2011 at 3:15 PM Report abuse rate up rate down Reply
2 replies to joethightwad's comment

As soon as the government reduces the deficit and we aren't borrowing to pay the INTEREST on our debt, I will sell my gold. Anyone know when that will be ?

January 12 2011 at 3:34 PM Report abuse +1 rate up rate down Reply

Sure there'll be large selloffs and profit taking along the way, but it's still going to take a lot of shrinking U.S. dollars to buy an ounce of gold.

January 12 2011 at 4:26 PM Report abuse +1 rate up rate down Reply

Gold will continue to be a good hedge against the dollar -- this administration is printing and printing more and more paper money. Remember Germany?? The same thing could happen here - look at inflation too which is rising every week. Gas prices are up, food prices are up and so are restaurant prices. Silver is doing better right now but gold stock is good to have along with a food supply and water supply in your home. I drive a Prius and am pleased that my car gets 44 MPG - now that Calif. has a huge increase in gas prices.

January 12 2011 at 2:58 PM Report abuse +2 rate up rate down Reply

the american economy is a bubble and china is ready to be the boss so sit there and wait for it because comunism is coming to a town near you fact!!!we are in the deepest hole and there is no way out but war so prepare or you will have a piss poor performance god bless and good luck and no gold will go through the frigin roof so buy buy buy nothing can hold it down a couple of cooked up numbers i think not buy gold or your as will be sold

January 12 2011 at 2:56 PM Report abuse -2 rate up rate down Reply

If the Gold Bubble pops there will be a bailout for it , after all it is to big to fail .

January 12 2011 at 2:52 PM Report abuse -1 rate up rate down Reply
1 reply to hemipwr54's comment

Your comment is so idiotic, I won't even bother to dispute it.

January 12 2011 at 4:29 PM Report abuse rate up rate down Reply

Gold has been the universal standard of wealth since the dawn of civilization , it will always have tremendous value. The out of control printing of fiat currency will sonn tell the whole story of where AU is headed ! You can't print a limitless supply of gold or silver , enough said!

January 12 2011 at 1:52 PM Report abuse +1 rate up rate down Reply
1 reply to martinsportraits's comment

Our government abandoned the gold standard for the simple fact that a fiat currency is much easier to manipulate than a currency backed by gold. That worked out real well, didn't it?

January 12 2011 at 4:36 PM Report abuse +1 rate up rate down Reply

Yeah, if you've got it, sell it. If not, then buy it. Always people hyping both ends of extremes on anything traded on Wall Street, with their own agendas. The traders all work on commission you know. If things really get bad, eat gold and see how well it sustains you. And if you hammer it out flat, it could be used to put a roof over your

January 12 2011 at 1:20 PM Report abuse -2 rate up rate down Reply
Big Marshal Mac

All the experts here and there talking about how Gold/Silver will drop. I'm not worried and sure am happy this idiot bought Gold and Silver in the 1980's and early 2000's when it was cheap. Everyone was laughing at me folishly spending on such a dumb investments. All were talking about the stock market Enron and Medoff with all your money.I for one have not lost ONE dime in the stock market but sure have made a profit in the two metals and retired at age of 40. Yes, Gold will continue to climb and Silver doing even better. Now go ahead and make fun of this dumb old country boy again. My investments are worth more than your American Dollar and will always beat it. Look at the idiots in Washington. All you Obama supporters got what you voted for a "Street Con" Maybe you should have gotten Street Smarts to add to that Ivy League education.This guy is just a dumb old country boy but has his home and 125 acres paid for and owes no one anything. Pretty good for a dumb country boy without a Higher education.My Retirement checks come in every month and are TAX FREE! Here is a tip for free: "COPPER"

January 12 2011 at 12:59 PM Report abuse +4 rate up rate down Reply
1 reply to Big Marshal Mac's comment
Big Marshal Mac

Hey amazin999 why do I need a course in basic economics? I have done very well without that IVY league education. I have a six figure retirement no debt and no stress.

January 12 2011 at 5:33 PM Report abuse rate up rate down Reply

For late-comers like me, it's too late to invest in gold. Like all commodities, their value is subject to speculation no matter how you look at it. It was ideal to invest in gold 3 years ago when it was at around $350/oz. I don't foresee gold quadrupling its value again, at least in my lifetime.

January 12 2011 at 12:37 PM Report abuse -4 rate up rate down Reply
2 replies to Pllc15's comment

I suggest you take a course in basic economics. If you do (and understand) you'll realize how naive your comment is.

January 12 2011 at 1:52 PM Report abuse rate up rate down Reply

plic15...Think of gold as a currency hedge and not as a commodity that's increasing in price due to speculation. Just know that it's going to take a lot more cheap, inflated U.S. dollars to buy it in the near future. If you can possibly hold on for another 3 years, you may be proven wrong in your foresight.

January 12 2011 at 5:57 PM Report abuse rate up rate down Reply