To determine if gold may be bottoming, I think Ben Hunt's game theory approach to investment decisions is a useful framework to use. First, a quick summary of Ben's theory, mashing up his words from this article:
"Game theory is a methodology for understanding strategic decision making within informational constraints where each player’s decisions are made in the context of expectations regarding the other player’s decision-making process. In other words, playing the player, not the cards.
The secret of effective market game-playing is to recognize that the market game hinges on the Narrative, which is a set of public statements made by influential people about the market. These statements create Common Knowledge - what everyone knows that everyone knows."
Goldbugs have their own narratives to explain gold price movements but as I discussed in this post, what matters is the narrative that mainstream investors are hearing as that is what is driving their investment decisions and money flow (in or out of gold).
Over the past year the mainstream narrative has been that "gold is in a bear market and shows no sign of ending". The focus for this narrative was the reduction in ETF balances, with each subsequent redemption validating the thesis, acting as a negative feedback loop. On top of that you had the idea that the US economy was turning around and the associated taper talk.
For example, see this Gulf News article where it says that gold buyers (my bolding) "were put off by gold price’s sharp decline and did not want to be seen buying when there was every chance that it could drop further" or analysts falling over themselves to forecast a lower gold price bottom than the last forecast.
Recently, however, I've noticed the emergence of a different narrative, one that asks whether gold's bottom may be near. See these recent examples:
AFR: Gold is on the way back
Barrons: Gold Fund May Be Near Bottom
City Index: Gold rebounds from three-year double-bottom low
CNBC: Gold to see bottom building process
Daily FX: How to Trade the Double Bottom on Gold
Now this narrative is not bullish and more cautious but that in itself is significant because it is the precursor to more bullish narratives. It also gives confidence to smart money to start to get into the market, as we can see from that Gulf News article where it notes that "with gold prices seeming to have settled in at the $1,200 an ounce mark, buyers are heading back to the shops."
I would also note Rick Rule's recent observation that "it appears big money is circling the physical sector as well. The money has not yet ‘landed,’ but it is important to know what might happen to those markets if the ‘big money’ begins to settle. We believe it would not take much demand for physical delivery on the futures exchanges to create a very unsettling experience for the large institutions that are short the trade."
When the gold price bottomed at $250, there was talk of it going to $200 or below, which was mine cost at that time. It never got there because the smart money realised that at those prices gold miners would start to close and the supply reduction would push prices up. I believe they started to buy ahead of that, and those actions provided support and the basis of a new narrative for gold.
We could be seeing the same dynamic in play today. I'd suggest keeping an eye on the mainstream narrative around gold, just as much as the charts, if you want to work out if gold is bottoming.