Riding the Gold Wave: Is a Correction Coming?

Gold has reached new highs over the past 24 hours, aided by the Indian Government’s decision to buy 200 tonnes of the International Monetary Fund’s gold at $6.7 billion, making it the 10th biggest bullion holder in the world. The move also helped India diversify its reserves in a way that spreads its risk, which is over-weight with overseas currency.

Of $285 billion in Reserve, foreign currency assets account for more than 90%, or $268.3 billion, followed by gold at $10.3 billion, IMF’s special drawing rights at $5.2 billion and a reserve position in the IMF of $1.59 billion, mainly in the form of U.S. Treasury bonds.

The move to hedge the falling USD value by India, which helped move gold higher, was a contributing reason for a push lower on the U.S. dollar index. Oil was also higher, and has risen by almost four dollars since yesterdays 76.50 support zone test.

As such, the major pairs are mostly higher, aided by S&P futures were not been able to break through the 1025 support area in the previous Wall Street session. It seems that S&P is in a long corrective mode of the recent bear market from 1098 top.

Gold has been the most interesting investment of the past few months, as prices broke through the psychological 1000 level. This bullish gold move however, like every other bullish move, needs to take a rest, and a technical correction. This may happen if traders start to now book profits from the end of August 2009, when the recent bullish leg started.

Gold Daily

Elliott Wave view

From an Elliott Wave perspective, gold traded into an area around 1090-1100 where the top of the last impulse move may get hit. As such, we will be looking for a corrective move down in wave IV, near to the 1030 support area, as the market has already made five waves up in an extended wave III, shown on the chart above. The basic Elliott Wave rule is, that after every five waves, a correction should follow.

Gold Daily

Elliott Wave view (posted on 4th of August)

Comments

[Mad Hedge F...:]

uhb ) News broke this morning that, out of the blue, the Reserve Bank of India bought 200 metric tonnes of gold from the IMF for a handy $6.8 billion. The news set the gold market on fire, boosting the December futures $40 to an all time high of $1,088. It is the largest transaction in the barbaric relic since the Alaric’s Visigoths sacked Rome in 410 AD. It has been public knowledge for some time that the IMF was looking to unload 403 tonnes of the yellow metal in order to fund lending to poor countries. Many traders say this threatening overhang is why gold failed to definitively break out to the upside this year, despite six attempts. The expectation was that China would take this hoard as part of a broader diversification away from the dollar. Bringing India into the fray, which had no prior history of stockpiling gold, is a whole new plate of basmati rice. Not only does this raise the prospect of a bidding war with China for more gold reserves, other cash rich emerging market central banks are likely to join the mosh pit as well, no doubt panicked by the ominously rising whirr of printing presses in the developed countries. My short term goal for gold was $1,200, but I now have to raise that to the $1,300 favored by some chartists in view of the new dynamics. If you want to see my long term target, take a look at the chart below, which has gold zeroing in on its inflation adjusted all time high of $2,358. For those who prefer holding the barbaric relic of the physical kind, visit the tightest spreads in town on American Eagles and bullion at www.millenniummetals.net/ . And while you’re there, sign up for their free research product on precious metals.

Nov 04 01:15 PM

[silverwood:]

When the Banking Cartel's bullion banks go up again foreign governments, ie India's Central bank, their prized method of price discovery over at the Comex, which is massive paper contracts sold short, will be undermined by physical supply removal.

Nov 04 01:22 PM

[Laurence Hunt:]

Hmmm...

I'd be surprised to see a big correction in gold here. We've spent almost 2 years building the $1000 base, and gold has recently corrected - gold stocks with it.

I'll grant you, nobody believes in the current gold move, or gold stocks would be 20% higher here and now. But that tells me the trade is not at all crowded.

Gold will correct when we are all believers. Don't think that has happened so far.

Nov 04 10:10 PM