Gold Correction Now More Likely than Not

At the beginning of October, 2008, I remember reading a number of articles covering U.S. stock markets that heavily pushed the message “it’s time to buy U.S. stocks!” However, since the beginning of October, 2008, the major U.S. stock indexes have sunk like a stone, shedding roughly 23% of their value.

Since these analysts were severely wrong in October, they decided to push the same message again in early January, 2009. Surely, if U.S. markets had moved 23% lower from the previous supposed “bottom” of U.S. markets, then these same analysts were certain the start of this new year most definitely offered a low-risk, high-reward setup to make very quick profits in U.S. markets.

In fact, in January, 2009, I recall a headline that blared, “THREE SCREAMING BUY SIGNALS!” (emphasis mine). Again, these bold declarations of U.S. markets hitting bottom turned out to be premature as the U.S. S&P 500 (NYSE: SPY) has plummeted another 17% in value.

See a pattern developing here? It’s the PT Barnum approach of finding the sucker in all these articles. You see, investment companies are looking for suckers every day because every day they know they’ll find several, or perhaps even many. After all, Albert Einstein (1879-1955) once stated: “Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.”

In investing, absent of solid investment guidance, there are two psychological ploys investment companies can rely on to sell their products and services – fear and greed. The above messages sent out at the end of 2008 and the very start of 2009 were designed to appeal to an investor’s fear of being on the sidelines in cash if U.S. stock markets were to furiously rebound. Now, because these “sucka” messages have failed miserably, a lot of investment companies have resorted to pushing the one single thing that has been working recently – gold and precious metal markets. However, if you were burned by any of the messages above, don’t be burned again by these same messengers in the gold markets.

Though I’m sure a lot of you are being bombarded daily now with messages of why you should buy gold today and why gold is going much higher, realize that investment companies that have just jumped on the gold bandwagon simply to “sell you” are likely to offer you terrible guidance in the gold markets.

How would you know if these companies have just jumped on the gold bandwagon? That’s the beauty of the internet. “Google” them. Find out if they employed analysts last year that disseminated stories about gold being a “barbarous relic”, a terrible “non-interest bearing asset”, and just an all-around poor investment just a few months ago when they were trying to sell you traditional stocks. And then find out if these same companies are now spreading “buy gold” messages. If so, avoid them like the plague.

Why? Such flip-flopping demonstrates that these analysts have zero understanding that this current global crisis is a monetary crisis and that they will sell you whatever they think you will buy without the ability to dispense any decent guidance along the way.

To use an analogy, these analysts’ commentary about gold is likely to be no better than finance sector analysts that wrote about “the bottom” of banking stocks six months ago. On July 15, 2008, when some analysts were calling a bottom in bank stocks, Bank of America (NYSE: BAC) closed at $17.75 a share, Wells Fargo Stock (NYSE: WFC) at $19.72 a share, and Citigroup (NYSE: C) at $14.10 a share. Today? Their stocks respectively stand at $3.91 a share, $11.03 a share, and $2.14 a share. Similar to these analysts that failed to understand the structural defects in the global banking system and recommended banking stocks solely due to their low valuations (that they did not understand could go much much lower), analysts that don’t understand the severity of this current monetary crisis will never offer you solid guidance about investing in gold.

You see, gold is a terribly complex market and it takes years of training and understanding to develop a sense of when and what gold investments to buy and to understand what signals to ignore and what signals to value. With U.S. Treasury and U.S. Federal Reserve intervention into gold markets at levels not seen since the 1930s, it becomes even more paramount to know exactly where and what to look for to understand where gold markets are heading.

Even with an asset that may seem simple to buy such as physical gold, some physical gold investments will yield much stronger profits over the years than other types of physical gold investments. Even how you buy gold bullion could create differences of thousands of dollars in your entry price when compared to another investor that purchases the same amount of ounces on the same day.

Now that gold is making headlines of major financial media outlets, analysts and companies that know nothing about gold are telling you to buy now. It’s a similar strategy to mining companies that have no gold expertise but change their company names to include the word “gold” so that they can fool investors into buying their stock. However, gold is such a complex market that it is impossible for any investment company or analyst that is jumping on the gold bandwagon to offer you sage advice. If you don’t consult an expert, everything about the gold market will probably be explained improperly to you.

Though many investment companies will push gold ETFs as an easy way to buy gold, I can tell you right now that gold ETFs (NYSE: GLD) are one of the absolute worst gold investments you could ever buy. The companies that push gold ETFs either are ignorant about the dangers of these ETFs or just want the commissions for pushing this paper form of gold. If you have no idea what I’m speaking of, and have been advised to buy the GLD, then you have proven my point about these Johnny-come-lately gold “experts”.

As I stated before, not all gold investments are equal. Not even close. There are major producers, junior producers, explorers, developers, bullion coins, rare coins, bullion bars and many other ways you can invest in gold. At certain times, gold stocks may be a better value than gold bars and at other times, gold bars will be a better value than gold stocks. And what about right now? The precious metal stocks still have greater upside than the underlying commodities at this point, but both assets are very vulnerable to a correction, and perhaps a significant correction right now.

Besides the significant psychological barrier of the $1,000 an ounce landmark (due to the enormous tumble in gold prices that occurred last July, 2008 right after gold reached this pinnacle), other developments in futures markets that lurk beneath the surface also point to a temporary correction in the works over the next few weeks.

Furthermore, despite the strong showing of gold prices in recent days, the “leveling-off” behavior of major gold stocks like Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM) also raises a red flag. Although relentless negative news about the financial industry contributed to 3-4% selloff disasters in China, Hong Kong and South Korea markets yesterday, and these ongoing developments can be expected to give support to gold markets as a continued “safe haven”, one has to understand that what one expects to happen in gold markets is not necessarily what will happen because they have not been “free” markets for quite some time now, and certainly never during the 6+ years that I have carefully been studying them.

I’ve been advocating gold as an investment since 2005 and have publicly stated my affinity for gold on my blog since September, 2006 with an article entitled “Gold’s Glitter is Genuine”. Before that, I started advocating purchases of physical gold to my company’s clients as far back as when gold was trading at $580 an ounce.

With gold having a history of volatility, one needs to buy or add to existing gold positions with solid discretion and not indiscriminately. The odds of a correction occurring can change week to week, depending on behavior in the COMEX markets. However, as of today, the odds favor a correction so buying into gold right now is not a low-risk, high-reward proposition. Even if I turn out to be wrong, and gold does not correct in a meaningful manner, in hindsight, I would still not have bought gold today because the risk-reward setup is less than average right now. You only want to buy into gold when you have a favorable strong risk-reward setup. In addition, when investing in gold, one has to dig into government free-market intervention schemes into gold markets as a result of the carnage that is happening in stock markets worldwide to accurately anticipate the best ways to invest in gold.

The information I’ve uncovered in this regard tells me that a correction, and perhaps a significant correction in gold prices, is likely to occur in the coming weeks, though the long-term trend is still higher and significantly higher. But don’t misinterpret my message. Physical gold is one of the most conservative investments you could own right now. And even from today’s price, it is destined to go much higher. However, right now, the risk-reward scenario is not attractive at all. So despite the deluge of articles telling you to buy, buy, buy gold now, don’t take the bait, no matter how tempting.

Disclosure: None

Comments

[gdclarke:]

How does GTU rate as a way to own gold?

Feb 25 07:15 AM

[D. McHattie:]

J.S., I think a break-down of your risk-reward calculation would have been more valuable than a cautionary criticism of other 'treat of the week' analysts (though no doubt the criticism is valid).

Feb 25 07:34 AM

[kelm:]

Good article but you only speak darkly of the risk reward at this juncture without any details. I've been looking at gold daily and commenting on the market every few days for my readers. I fully agree that ETFs, while a good trading vehicle are dangerous ways to invest in gold. If anyone reads the prospectus for GLD you will come away very confused as to what actually underlies the ETF. Gold's move this time is about paper confidence globally and that is something the market has not really seen before. Typically gold has moved due to supply and demand, US dollar weakness and inflation. Now we have global concern with paper currencies, stocks and bonds. I think the next few days tell whether his is a healthy correction or a larger multi-week correction. What I do like is that many gold analysts are advising to take profits. That is a sign of a healthy market.

I discuss this much more on my site with detailed looks at the mining indexes, spot price, ETFs, lease rates and broader market implications.

Feb 25 08:44 AM

[know nothing:]

Great article, but if a person is making a investment for the long term, this could be a good entry point, if this is a healthy bull market correction, 939.00 to 930.00, should be the risk on the down side, The $950.00 area would be a area where a person could start getting their feet wet. When gold breaks out above the $1006.00 to $1010.00 the buying could pick up and then the $1000.00 would be a strong support level. I agree with everything KELM said especially the analysts advising to take profits.

Feb 25 09:21 AM

[Cesato:]

This is a seriuos call, every single forecast for Gold has been beaten to death since last year, what I think we should do now is follow our gut feeling and then establish an exit strategy and stick to it regardless of markets moves. Although I agree the price of Gold is in correction mode, the author ignores last year's move USD 991 - USD 961 - USD 1.030 so that only a sustained break below USD 946 would turn the scenario bearish medium-term. Know nothing is right, buy a call option at USD 1.010 or simply buy the break of USD 1.005 protecting your investment on a drop back to USD 991. Shorts at this point in time are for scalpers, Longs are a scream buy on any correction regardless of the level (USD 930/USD 850/USD780) the level for the correction is just impossible to forecast but a market reversal from the bottom can be identified on the
charts once the markte loses momentum on the downside.

Feb 25 10:00 AM

[Cesato:]

know nothign, you are so right in that call!!


On Feb 25 09:21 AM know nothing wrote:

> Great article, but if a person is making a investment for the long
> term, this could be a good entry point, if this is a healthy bull
> market correction, 939.00 to 930.00, should be the risk on the down
> side, The $950.00 area would be a area where a person could start
> getting their feet wet. When gold breaks out above the $1006.00 to
> $1010.00 the buying could pick up and then the $1000.00 would be
> a strong support level. I agree with everything KELM said especially
> the analysts advising to take profits.

Feb 25 10:05 AM

[Vuke:]

Your argument is compelling. Buying gold at this moment certainly risks the danger of an imminent correction. However, there is another aspect to consider, that being the actual shortage of gold and silver particularly in coin coupled with the apparent market manipulation of physical bullion.

It is becoming more and more dificult to obtain small lots of bullion. if an attractive offer of such appears now it may be wise, in some individual circumstances, to buy, take the correction in its stride and emerge in the future as a holder of low cost bullion rather than a seeker of what may be a much higher priced product.

The last correction did not flush out a lot of sellers and, given the mad rush to print these days, the next correction is unlikely to do so either.

As a periodic buyer of small amounts one should not worry excessively about fallbacks and be very happy with the appreciation received on previous purchases. To such, it's about accumulation as an insurance policy, when available, rather than paper profits in trading.

Gold, just like insurance, will be the one commodity you cannot buy just when you really have need of it. Like insurance let's hope that day does not arise.

Feb 25 10:18 AM

[Bill Jencks:]

Good article - but gold also has one big advantage - it is a valuable hard asset with no counterparty risk. I personally would not invest in any mining stocks and certainly no stocks that are dollar denominated at the moment(another major area where your profits can get trashed).

I would just buy gold online. The two best sites for this are probably The Perth Mint and GoldMoney(Google them) which is run by James Turk. Both allow you to buy gold bullion at low storage rates, and GoldMoney allows you to transfer your gold into USD, GBP, CHF or EUROS electronically and quickly. Here I'm not looking to make money, I just want to preserve the value of my capital.

Anyone who is investing in stocks now in the medium or longterm is being very foolish I think.

Feb 25 11:37 AM

[ROLEXDAYTONA:]

Gold went down yesterday 2.5% but mining stocks were beated to death with some down 10-20%.
Another 100$ down for gold, and you are done with this stocks for good.

Feb 25 01:28 PM

[Chris Dowd:]

I'm a small buyer of gold on a monthly basis through an accumulation program. I'm a long term investor. I cheer for lower prices at the end of month when my purchases are made automatically. I would say small buyers should start now. As another poster noted- physical gold is getting harder to come buy. For silver it is even worse.

I do think a large correction is coming as well. Perhaps several hundred dollars worth. I'll be increasing my monthly investment accordingly to take advantage of what will be a great buying opportunity.

Feb 25 06:34 PM

[scotty1560:]

the biggest danger for gold would be a rally in the equities markets..
money would transfer for a trade into the rally.
let's see if gold holds that 920-925 range where it broke through.

otherwise, gold should hang and eventually mount another rally
against the declining dow.. kinda the anti-dow if you will.
2/1 ratio to dow could be in the cards say 2 more years out..
3500 dow and 1700+ gold or 3000 dow and 1500 gold.
oil will eventually rise but looks like two years from now.. imo

Feb 25 07:52 PM

[name:]

Thanks for the article, it's always a pleasure to read commentary on gold that is sensible. I too believe that gold is a wise (life saving?) long term investment. BUT, right now in the short term i believe it should be shorted. At the very least no one should be a buyer.

Gold's technical resistance at $1000 is not to be taken lightly. Hedge funds are still to my knowledge under severe redemption pressure. They have bought in to gold's current uptrend; they will severely drive down gold's price very soon.

If one waits for a big correction to buy gold, you'll extend your precious purchasing power and be buying a great long term asset.

Feb 25 08:13 PM

[kotika98:]

> Albert Einstein (1879-1955) once stated...

no need to be so precise about his birth and death dates, since he never said such thing. it just *sounds* like something einstein might say.

Feb 25 09:41 PM

[Gary Orman:]

Please forgive this bear of little brain... My little understanding of gold is that it is fairly worthless and declining in value continuously.

As a hedge against inflation, it seems to be useless: if one takes the relatively 'high' rate in the 80's then gold should be around $6,000/oz. today (taking the 'old' measure of inflation, not the US-revised version). If one takes the more 'average' rate of around $400-$500/oz. over the last century then gold should be perhaps in the $3,000/oz range.

Why is it so incredibly low now? And will it really go as high as it needs to in order to counter the coming inflationary years thanks to the US money-printing machine?

Feb 26 12:17 AM

[hpcooperjon:]

buy gold futures and take delivery on the due date. This is not for trading, it is insurance.

Feb 26 02:03 AM

[Doc 224899:]

Right now we are in a situation where a massive gold rally is imminent and so is a massive correction. When gold corrects (everything corrects eventually) the probability of a massive rally that offsets the correction will increase as global investors on several continents look for bargains in the gold market.

The day of buy-and-hold investing is over. There are ways to make money on gold during a correction, and I intend to use them. There are also ways to make money in a gold rally, and I intend to use them. Every time gold swings there is a profit opportunity for the astute investor.

Having said that, I thought Kim didn't review all the factors exerting up-pressure on the price of gold, not did he address the issues of timing.

Feb 26 09:12 AM

[J. S. Kim:]

Thanks guys for all your comments. Some of you have very valid points that perhaps I didn't explain enough some of my thoughts but that is the difficulty of trying to express everything in an approximate 500-800 word article. However, you will note a couple of things, that since I wrote this article, gold has dropped from $994 an ounce (when I released this article on my blog, $994 an ounce was the price gold was trading at in the London markets) to a low of $925 an ounce so far. Thus saving nearly $70 an ounce is not a small amount even on a $20,000 purchase of physical gold).

To clarify some points, if I failed to do so in my article, I did not favor selling any physical gold because of this correction because I have yet to sell any of my physical gold. I will keep holding on through the temporary corrections until the mania phase arrives. I wrote this article as a warning to those seeking an entry point (again remember I released this article when gold was trading at $994 an ounce) or for those seeking to add more to existing positions.

To further address others that wished I had discussed in more detail some of the issues I briefly mentioned in this article you may note that I've written more than 40 articles about gold since 2006 on my blog so perhaps you can find more answers in my own blog archives at www.theUndergroundInve.... If you reference these articles, you will discover that I am still very much a LONG TERM gold bull, have always been for many years, and my above article does not sway my long-term bullish outlook for gold.

All the best.

Feb 27 10:06 PM

[Britt:]

Hello everyone:

I've just recently been following J.S. Kim's advice, and have recently finished his book (which I highly recommend). From my understanding of this article, J.S. Kim, and others recommend holding off on purchasing gold, and waiting for a "correction" if I'm looking to enter the market.

Please, someone clarify this, and provide a decently articulate explaination if they feel they are qualified. I'd really appreciate it if someone feels inclined to do so!

Thanks,
Britt

Mar 04 10:08 PM

[silverfox:]

I would just like to remind everybody what the average price of an ounce of gold should trade at annualy.
Centries ago an ounce of gold bought you a 1 year supply of bread.
Yes thats 365 days times the price of a loaf of bread today.
So right now where i live it costs about $2.50 to buy a loaf of bread.
365 x 2.5 is equal to 912.5 per ounce of gold.
Nobody talks about it todat but BREAD not oil, not metal, not rel estate is more closly tied to the price of gold than any other commodity is today.

Mar 05 01:37 PM

[name:]

Wow! Thanks Burge. Your comment above is really interesting.

Mar 08 05:23 PM

[User 364760:]

Excellent article. Gold is currently at $890. Thanks for the advice. Do you know how much lower gold is going down before another rally?? Thanks

Mar 10 12:05 PM