Gold prices consolidated this morning, holding firm above a key support level at $1650. Yesterday’s trading range was significant as it re-established gold’s Fibonacci retracement at around $1681 as an important resistance level. In other words, that’s where it was supposed to top out from a purely technical standpoint.

The reason this is significant is that it demonstrates that traders are in control of the gold market at the moment. After a multi month up trend gold has now settled into a trading range in the mid $1600’s and is consolidating nicely, waiting for its next cue from the international currency markets. Yesterday’s up trend was the result of a slightly weaker dollar, which pushed traders to bid up gold prices. When the $1681 level was breached, the metal retraced its gains, correcting back down into its’ comfortable trading range.

What this really demonstrates is that investors are relatively neutral to gold as a safe haven and growth play at the moment. Last month’s violent correction has decreased comfort levels among protectionist investors who are in wait-and-see mode at the moment.

So what comes next? That depends on a couple things. First, from a purely technical standpoint, gold could be expected to stay in this range for several months. If you’re looking at it strictly from the standpoint of the charts, gold has essentially charged upward for the better part of 37 months, mostly uninterrupted. This means that a consolidation period of range bound trading could last as long as 6 months, give or take. As we have now been in this trend for about 6 weeks, the chart boys say we’ve got a lot of range bound trading ahead, bouncing between $1550 and $1725 for the rest of the year.

In that case, shouldn’t we all just put the check book back in the drawer until February before adding to gold positions? Not so fast.

One thing this bull market has demonstrated to us time and time again is how technical analysis can be extremely misleading in unstable economic conditions. Without any influence from outside markets, gold could very well stick to its own chart patterns for months to come just as it has over the last several weeks. The problem with making that assumption is that we’d be betting that nothing else will go seriously wrong with the global economy in the next four months. Anyone want to take that bet?

There are several major calamities that could easily break gold out of its current trance. First of all, we can’t forget that the second largest economy in the world is in the midst of the worst currency crisis since the world went off the gold standard in 1971. A disorderly default in Greece could easily bring massive risk premium back into gold and push prices much higher. Likewise, another round of expensive bailouts could drive gold up as an inflation play.

Then there’s the good old battle brewing on Capitol Hill. Keep in mind that the congressional “super committee” is still nowhere near coming up with the cuts needed to avoid yet another nasty showdown over deficits and spending here at home. If you think either side is going to be more reasonable this time, just remember there we’re coming up on election time. Compromise is not an option in election years, so we can expect little progress on the debt front here at home through the end of 2012.

All in all, the technical analysts are right in saying we should be in a corrective phase for the next several months. That said, every seasoned gold buyer knows that gold does not exist in a vacuum. It responds to stock, debt, and currency markets in a big way. If you think the next four months are going to be quiet and that the global economy won’t suffer any blows, keep your money on the sidelines. I have a feeling however, that the folks that have ridden this market all the way up from $300 an ounce will take this opportunity to keep adding to those gold positions.

On another note: It’s worth mentioning an important strategy that can make a big difference from a buyer’s perspective in a market like this. When there is a lack of direction to the gold market in general, look for products that have unusually low premiums. Gold bullion will, for the most part, follow the spot price up and down. Some semi-rare or certified coins will be carrying much lower premiums than would normally be expected since demand has stalled out for the moment. Ask around and see what kind of deals you can find. You might be pleasantly surprised.

 

Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to meritprofiles@gmail.com.