Three Scenarios For Gold

It seems like everyone's guess nowadays is whether gold has topped and if not, how much more upside potential is there. I'd like to present my intermediate view on gold in this post. But first, a little bit of history.

For those of you who are not familiar with a general trajectory in gold during this bull market that started in 2000, I must first point out that gold tends to progress in some sort of wave patterns. It usually consolidates for several months or even years, making only a very modest, but steady progress. After these consolidations a violent parabolic tops usually develop. Let me show some historical tops to illustrate this.

The first significant parabolic top occured in May of 2006. The wave started in February 2005, consolidated for 9 months and then suddenly shot higher, gaining approximately 25% in twelve weeks. It then consolidated for seven weeks and exploded higher again to a final parabolic top that made more than 35% in about 8 weeks. After that gold plunged 20% and the whole thing started all over again.

March 2008 top was almost an exact copy of the previous, with one exception. Everything extended as precious metals sector attracted more and more investors. Starting in June 2006 gold consolidated for fourteen months, followed by two parabolic stages, gaining 20% and 30% in 12 and 13 weeks respectively. This wave was reset by more than 30% plunge during the 2008 general market collapse.

OK, and here we are. History repeats again, you know the drill. The current wave started in October 2008. It consolidated for two and half years (extended again!) in a steady uptrend. If (IF!) this wave is to finish in spectacular two-stage parabolic top as we are used to, the first stage gained 25% in 8 weeks and is already over. And if another leg up is following, gold should now consolidate for 3 to 8 weeks and explode higher into another 25% to 35% parabolic run, which could take gold to as high as 2300. A severe 25% plus correction should then follow before another wave starts.

Of course, this is just speculation! As a trader I must always consider all possibilites. I think the following three scenarios are the most probable right now. The first one is the two-stage parabolic top discussed above. If this one is to reveal, we should see few more weeks of consolidation with virtually no progress, followed by break out of consolidation pattern.

The second scenario is a double top. Gold could marginally break to new high without consolidation and then plunge lower.

The third and the least preffered one is the possibility that gold already topped. We will know this is happening if gold fails to make new highs and violates the last swing low.

As you can see all three scenarios can be easily identified so we can be preparred for any one of them. Right now I don't have a clue what will happen. We'll just have to wait until the market itself tells us what it wants to do.