Three Scenarios for Gold

10/30/2013 9:00 am EST

Focus: STRATEGIES

Lawrence Edelson

Editor, Real Wealth Report

We see three potential scenarios for gold; to invest without having these scenarios in mind is simply foolish, says resource specialist Larry Edelson in Money and Markets.

First, it's bottoming. I can't tell you precisely when, or at what price, but I have every reason to believe that gold is now in the timeframe for a bottom, and a major bottom at that.

In fact, it may have already bottomed at $1,178 back in late June. That is possible. Or it may dip back to near $1,178 one last time, soon, or even after a big rally. Or it may just explode higher here and now.

It is impossible for me to say with any certainty. For anyone to say, actually. All I can tell you is, again, that all of my models indicate that gold is very near, or already may have seen, an important bottom.

Second, trying to time the exact day, or even the exact week, and the exact price, would simply be foolish. That said, let me give you the three scenarios I see for gold.

If it seems like I am talking out of both sides of my mouth, let me assure you that I am not. I am merely giving you the three most likely scenarios for gold going forward, scenarios you will need to keep in mind to get properly positioned, so you can minimize risk and maximize potential profits.

Scenario #1:

Gold's low at $1,178 in late June was the major bottom. In this scenario, gold must now confirm it by moving and closing above $1,449.50 on a Friday weekly basis, followed by a weekly close above $1,605.50.

So far, gold has taken out important short-term resistance at the $1,338 level. That does indeed imply a further rally, with the next important level of resistance at the $1,400 level, followed by $1,449.50.

This is now becoming the highest probability projection. But still, as in life, nothing is certain, so we must keep an open mind toward the next scenario.

Scenario #2:

Gold continues to rally, as high as $1,605.50, but fails to close above $1,449.50, or $1,605.50 on a weekly closing basis.

Gold then trades back down, even as low as the $1,265 level in early 2014, and then begins another move higher, one that eventually gives us the buy signals we need to confirm the end of the bear market and the beginning of the next leg up. The $1,178 June 2013 low holds, but gold swings wildly before taking off for good.

Scenario #3:

Gold continues to rally, as high as $1,605.50, but fails to close above $1,449.50, or $1,605.50 on a weekly closing basis, and then collapses into a major new low in 2014.

Whereas a new low below $1,178 was the highest probability before, it is now the lowest probability scenario. But we simply cannot throw it out the window.

In this scenario, we see a decent rally in the weeks ahead, but it fails to issue major confirming buy signals, and instead, trades lower, as in Scenario #2 above.

But instead of holding major support at the $1,265 level early next year, gold crashes right through the June 2013 low at $1,178 and makes a new low down at major system support at the $1,035 to $1,050 levels.

Now, I fully realize you might not like anything I just told you, that you think I'm hedging my gold forecast, or talking out of both sides of my mouth. Or that you like Scenario #1, the most bullish, and you don't like, or agree, with the other two scenarios.

That's okay. I am not trying to win a popularity contest. I am not here to tell you what you want to hear. My job is to tell you what I see ahead, based on my tried-and-true models and indicators, and without any bias.

I always call them like I see them, and precisely the way I would put my own money on the line, which brings me to the question, “What should you do now in gold? In silver? In mining shares?”

As you can tell from the above three scenarios, we are likely to see gold now rally into year-end and as high as $1,605.50 or even higher.

That sounds really exciting, right? Heck, if that kind of rally were to materialize, it would be gold's best performance in almost three years.

But unless gold closes above $1,449.50 and $1,605.50 on a Friday closing basis, then the gold rally would be for naught, it would be nothing but a bear market rally. And if you loaded up too much on gold, it would backfire on you.

So instead, now is merely the time to begin to test the waters. You don't go all in, you don't over commit, you don't become impatient, and you don't get overly emotional.

You map out your strategy based on all the evidence and data you have, and then you focus most of your energy on controlling the unknowns, your risk. That's how the most successful investors and traders make the most money, by controlling, and indeed, insuring against, the unknowns.

For gold, that means long-term investors can start buying gold again lightly, committing at this time, no more than 5% of your funds available for investing in gold, being fully aware that we do not have full confirmation yet that the low has been made. Testing the waters with up to a 5% position will help limit your risk.

For traders, you trade leverage positions, but hedge your bets with limited risk, inverse ETFs with options, or even spread your futures strategy both long and short.

Basically, you put yourself in a position to profit from a rally from a bottom in gold if we have already gotten it, yet you take out some insurance in case you're wrong.

As for silver, this may or may not surprise you, but I would continue to steer clear of the metal. There is a chance silver has not bottomed yet, even if gold has. Hard to believe, I know, but that is what my models are telling me.

For mining shares, my models tell me they have not yet bottomed. Again, hard to believe, but most mining-share ETFs have taken out that important cyclical low they made back on August 6. That means lower lows are possible.

So, like silver, it is indeed possible that mining shares may still move lower, even if gold has already bottomed and even if gold stages a decent rally.

Hard to believe, yes, but that's what my models are telling me, and I never deviate from what they say. They have proven themselves over and over, time and time again. So, for now, mining shares are not yet primed for major investment.

Right now, I urge patience and emotional discipline. Those are always the two most important elements of successful trading and investing, especially near major market turning points.

Major market turning points offer tremendous opportunities for profit, but they are also the most dangerous. The markets never take any prisoners, so you want to make sure, through patience and emotional discipline, that you're not going to be one of its victims.

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