Watching the hysterical people on CNBC talk about gold, you would think it's back to $500. But it's not. Gold made new highs in the $1,227 zone and then corrected about $100 in about a week. It's at $1,130 or so as of Wednesday. Not so bad when you consider it was trading in the $900s in September (when none of the CNBC commentators liked it).
This correction is small potatos compared with the reaction in 2008 off the $1,000 high, which took gold back down into the low $700s. Of course, you only had about a week or less to buy it in the $700s -- that's a $300 correction from the high. That's gold -- it can be enormously volatile because it is a small market and there are leveraged futures players involved.
The best way to take a look at gold is by scoping out the technicals on the 1-year chart. The pattern that I have noticed trading it over the last five years is a steady ascent marked by vicious corrections. The average corrections tend to last 1-2 weeks. On the technicals, the best way to spot that they are over is the Relative Strength Indicator (RSI) descending into the 40 zone and the Stochastic indicating oversold levels below 40 as well. Both of these areas, as witnessed in the chart below, have been great buying opps in the past. (Click to enlarge)
In addition, there is signficant congestion around the $1,100 level, which should serve as support on a further decline. If you figure that is where a lot of Johnnie-come-latelies got into the gold market, it shouldn't suprise you that they headed for the exits on the quick correction back from $1,227. Clearly a lot of "fast money" entered the gold market between $1,100 and $1,200.
Overall, though I could not interpret the chart above as bearish in any way unless we saw gold fall back below $1,045, the "India Buy Point" which set off the last massive run. In fact, as witnessed by the curvature of the support points, it looks as if gold is entering its parabolic move and I would not be surprised at all to see $50 intraday swings regularly.
Another thing that leads me to believe the correction is close to stabilizing is that we have had 3 consecutive days of declines and the biggest correction so far this year consisted of 4 consecutive declining days. It is typical in these corrections for the sell-offs to become less volatile on consecutive days, which we have seen this week as the gold looks for support.
You can still enter the gold market. In fact, it looks to be a good time if you felt left out at $1,200. Just make sure you aren't overleveraged and have a strong stomach lining, because it's going to be a wild ride from here on out.
Disclosure: Long gold futures
