NEW YORK (TheStreet) -- Everyone has been calling for a bottom in gold throughout the last year. But the fact is that gold and gold stocks are still clearly in a bear market. Just look at the 200-day moving averages. The previous trends were down and prices have been moving sideways for the past year.
A lot of newsletter writers and analysts are calling a bottom. Technically it's just a consolidation pattern. Consolidation patterns are a continuation pattern, meaning if the previous trend was down, which it was from 2011 till now, the odds suggest that the price will continue lower after this consolidation.
If this consolidation does happen to be the bottom then we can classify it as a stage I base. Gold (GLD) and gold stocks will start a new bull market, but the price needs to break to the upside of this consolidation pattern. Until it breaks to the upside, it is still in a down trend.
Gold topped out over three years ago. And I am in no rush to try to pick a bottom and be a hero here. I'm just going to continue waiting on the sidelines until the price confirms either a new bull market has started or the price breaks down and we get another leg lower.
For the big picture of crude oil, the chart looks bearish. It too has been trading in a range since 2011, and the price is nearing the apex of a consolidation pattern.
It's important to know that a pennant formation -- which is what crude oil has formed -- is the most predictable when the price breaks out of the pattern within the first one-third of the formation.
The longer the price consolidates and gets squeezed into the narrowing apex of the pennant pattern, the more unreliable the trend breakout will be. It becomes at best a 50/50 bet.
Crude oil's previous trend was up, but it's been consolidating for such a long time that price is now squeezed into the apex. This negates that bias for the previous trend to hold true, so we have no idea which way it will break out. But when it does, expect an explosive move.
A breakdown in crude oil will send prices to the $70 or $75 per barrel range, and that will hammer the Canadian dollar also. I can see $1 in U.S. currency being equivalent to $1.20 Canadian in a year.
On Gold and Oil
The U.S. dollar has been rising partly due to the euro falling. This strong dollar will put a downward pressure on commodities overall.
Gold and oil have not been that exciting for investors since 2011, when they topped out, but both are setting up for massive moves that should last months, if not a year or more. Once these new trends emerge expect to see them in the headline news every hour.
It does not matter which way these commodities break out of the consolidation patterns. With the dollar continuing to rise and the bearish chart patterns for both gold and oil, there is a good chance that much lower prices are ahead.
This will catch most investors off guard. It's human nature to try to predict tops and bottoms in the market. But this is why most investors get caught on the wrong side of the market. The market always has a way of catching the majority of people on the wrong side of a position.
I am happily sitting in cash with some of my investment capital waiting for gold and oil to break out of these large patterns. I would not be surprised if we see $900 gold, gold stocks like the NYSE Arca Gold Bugs Index (HUI) to be at $150, and $70 per barrel for crude oil.
I am not saying this is what I want, but you should be mentally prepared so you can get back into a cash position and take advantage of falling prices with me.
Big money will be made on the next price movements in these commodities -- whether we have to go long in the market or short-sell. Either way, we can make money.
So don't be a hero and try to pick a top or bottom, just wait for confirmed breakout, then invest with the trend.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates RANDGOLD RESOURCES LTD as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate RANDGOLD RESOURCES LTD (GOLD) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we find that the company's return on equity has been disappointing."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 4.0%. Since the same quarter one year prior, revenues rose by 27.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- GOLD's debt-to-equity ratio is very low at 0.02 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.10, which illustrates the ability to avoid short-term cash problems.
- The stock price has risen over the past year, but, despite its earnings growth and some other positive factors, it has underperformed the S&P 500 so far. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
- The company, on the basis of net income growth from the same quarter one year ago, has significantly underperformed compared to the Metals & Mining industry average, but is greater than that of the S&P 500. The net income increased by 14.5% when compared to the same quarter one year prior, going from $46.30 million to $53.00 million.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Metals & Mining industry and the overall market on the basis of return on equity, RANDGOLD RESOURCES LTD has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
- You can view the full analysis from the report here: GOLD Ratings Report