Is Gold Crash Proof This Time Around?

I’ve been
receiving quite a few emails regarding the topic of Gold and how it will
perform if another Crash hits. The following are my thoughts on this matter.

The first
thing that needs to be said is that IF we have another systemic meltdown like
that of Autumn 2008, Gold will likely go down along with everything else. There
are simply too many big players (hedge funds, investment banks, etc) with heavy
exposure to Gold who would be forced to liquidate their positions during a
systemic collapse.

I know this
is not what the Gold bugs want to hear, but during systemic Crises, just about
every investment on the planet plunges while the US Dollar and Treasuries
rally. Of course, this time around if another 2008-type event hits, it will
undoubtedly involve or be focused on sovereign debt. So this raises the
potential that Treasuries, particularly those on the long-end of the yield
curve, could be hammered as well as all other assets outside the Dollar. This
is worth keeping in mind for those who view Treasuries as a safe haven.

So if we go
into a 2008-type event, Gold will fall.
It will likely fall much less than other assets (stocks and industrial
commodities), but it will still go
down at least at first. This forecast is confirmed by the market action in 2008
as well as the market collapse from April 2010-July 2010. Both times Gold took
a hit, but both times it came back quickly.

So if you’re
heavily exposed to Gold, you’re going to need to think “big picture” or have a very
strong stomach when the market Crashes.

Now, let’s
take a look at the charts.

For
starters, the number one metric you need to focus on in terms of determining
Gold’s market action is the 34-week exponential moving average. Since the Gold
bull market began in 2001, this has been THE support line for Gold.

As you can
see, Gold has only broken below this line ONCE in the last ten years and that
was during the 2008 systemic collapse. So take a note of this line and always
watch where Gold trades relative to it.

Indeed, a
significant break below this line that DOESN’T occur during a system Crash
would be a MAJOR warning that the Gold bull market is in trouble. Remember, the
ONLY time we took this line out before was during the systemic collapse in 2008.
So a break below it WITHOUT a Crisis would be VERY bearish.

And if Gold
breaks below this line on its own (without a Crisis) and then fails to reclaim
it… well, then it would be SERIOUS time
to reevaluate the Gold bull market story.

Because of
its significance as THE support line for the Gold bull market, the 34-week
exponential moving average also serves as an excellent gauge for determining
when Gold needs to take a breather or correct.

Indeed,
anytime Gold has stretched too far away from this line to the upside, it has
usually staged a pretty sharp reversal to re-test this line. I’ve circled the
most significant episodes of this from the last seven years in red on the chart
below.

These are the BIG picture gauges and items
to take note of: the points to remember in terms of determining where Gold is
in its bull market and whether it’s an asset class you want to “buy and hold.”