Summer Bottom Preparing Gold for a Launch?

After holding above its December lows, gold may be poised for a post-summer breakout...

The markets look rather desperate these days. We've had stimulus from four central banks alongside the Eurozone bailing out their banks and yet the markets still don't seem satisfied.

As for the yellow metal, she has held strong above her December lows (a difficult thing to do in the summer) despite the markets' thirst for more - and all of this amidst a strengthening dollar. One can argue that these aforementioned factors alone could indicate a bullish signal, especially considering that more stimulus packages seem very likely in the near to moderate future.

Historically, the June summer months tend to account for the majority of lows in gold, with the next popular low month occurring in August. This means that we (and you) will have to carefully observe the $1,536 lows over the next month or so.

Should gold break out above $1,650 and remain there, we will have passed the worst hump and, if not by sheer momentum, quite possibly hit the $1,700, $1,800 and $1,900 levels as well. I'm not one to trade strictly on momentum, but historical trading (in almost ALL manner of tradable instruments) has shown time and time again that a breakout in prices has a much higher likelihood of occurring after an instrument trades in a tight range and/or close to a support level for an extended period of time.

Many have asked why there is so much talk of gold making a bull run once it hits those higher "psychological" levels and the main reason is that even though gold has risen in a pretty consistent bull market for 11 years now, it has YET to reach 'bubble explosive levels.' And what are bubble explosive levels you might ask? To put it in perspective, I am talking about major moves like those we witnessed back in the 1970's. In those days, the full bull market rose 2,300%, while the current bull market since 2001 has only risen 660% - less than a third of the 70's. For a gain of 2,300% at this juncture, we would have to see gold hit $6,000 and as unrealistic as that may seem, there appears to be some corroborating evidence.

Take a look at the chart below (courtesy of adenforecast.com). I know it looks like a five-year-old got a hold of a magic marker set and ingested a LOT of candy, but just bear with me for a sec.

The first thing to understand is that this is a multiple-time-period chart. Starting with the yellow line, we can see gold's annual price movement from 1968 to 1980. Not a bad run, but notice the explosion to the upside beginning around the 9th year. Keep in mind that the red line is NOT gold price, but the NASDAQ. Looks like she's had her shot. More currently, gold is represented by the green line and if you take into account all prior and potential future stimulus talks, QE3 for the U.S. and this comparison chart, you might see why there is all of this exciting talk of another major bull run for gold.

Of course on the down side, we have to keep in mind that morale for the gold bugs is on a tight budget. A lot of investors are getting discouraged by the decline of the last 11 months and it's not so much the amount of the decline (about 19%), but the LENGTH of time that has passed, slowly eroding the enthusiasm from gold's bull market.

Again, however, I would not worry because a tight range will usually only serve as an enclosed boiling pot building up more and more pressure until something has to give - violently. And fundamentals seem to indicate that the explosion will not be to the downside, given the huge mess that is the central banks' excrement.

Keep your chin up and if you feel like buying on weakness (in other words, at cheap prices), it doesn't seem too late to do so. And now you know what I'm up to...

Be safe, be wealthy and above all else, be happy.

- Mitch

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