On July 31, Lynn Carpenter in Investor’s Daily Edge explained why gold could drop as low as $750 an ounce. Lynn says much of gold’s downward trajectory is due to supply and demand. But if the metal falls below its support line of $750, its next target could be in the $600 to $620 range…

Fundamentals affecting demand for gold come down to supply and demand. That’s one issue here. In the short term, the usual pre-wedding season buying in India has been very light this year, less than half the usual demand in July and not very good in June, either.

I’ve heard people talk about this for years and it went right over my head. It seemed like an example of gold’s popularity, but not that important. Boy was I wrong.

This is a big deal because the Indian jewelry market accounts for about 22% of the world’s annual demand, according to India Finance and Investment. There is almost no demand for the currency market anymore, and otherwise there is plenty of gold around to recycle. So a drop in demand in India if it continues would be very important.

Another fundamental that affects gold is the potential availability of gold. Good mines with ore that can be taken out economically are becoming hard to find. That will push the price of gold back up in the long run. But that’s the far future at this point. That will have next to no impact on the price of gold this year or next.

A third “fundamental,” loosely speaking, is more of an “inter-market coordination.” When the dollar weakens, some other asset picks up the slack, and gold is very often the asset that benefits. The recent strength of the dollar is something that many gold watchers believe has pushed the metal down. If that’s the case, the push could be temporary. It’s not yet a sure thing that the dollar is going to maintain its newfound strength.

Finally, gold buying is often pushed by large events. Several commentators were surprised that Russia’s invasion of Georgia did not set off a spike of gold buying. But there is no reason it should have. Georgia used to be within the USSR. This does not have the same impact that Russia marching on Poland would have. Further, there were no signs that any other country was going to get embroiled in the conflict - at least not so far.

The only major reason gold might get hot again very soon is a return in dollar weakness. So that means, in the near term, momentum is the driver. What do the charts say? Let me update:

This chart is gussied up a little from the one I showed you two weeks ago. It extends to a longer time, though not back to 1900 or some ultra-long term. It has a bull support line on it, which is the tool I used for my target two weeks ago. This is a longer-term bull support line, dating from mid-2005. The $750 target was based on a mid-term trend line that originated in October 2006.

But there’s another tool that backs up this trend line as a target for the price of gold if it breaks $750. Look at the light blue lines. They are Fibonacci lines. These are based on an ideal ratio, “the golden mean” that turns out to have some significance in design, nature, and the stock market. Without getting deep into theories, these lines suggest likely limits on a retracement. You can see that the price of gold already obeyed the first line. The last one is a full retracement, which agrees with the bull support trend line.

The yellow lines show a “congestion” area where the price of gold has either stopped falling or stopped rising in the past. This should prove a substantial area of support for the price of gold if it falls under $750. But it may not stop it because momentum would be significant at that point.

And finally, I fall back to my favorite - a point and figure chart. I use these charts every day when trading options to estimate risk and reward profiles and set targets. Professional Forex traders are big users of point and figure charts. What does that say?

Much the same as the other chart tools. The red number on the side scale shows the calculated price objective for Streetracks Gold: $62. That translates to $620 spot gold, right in the $600 to $620 range a regular chart hints at.

Is this too much? It may be, but we don’t need to worry about $600 gold unless the price hits $750 and continues falling. Nonetheless, gold is bearish now.

Source: Why Is Gold Falling? And Where’s It Going?