Gold Pulls Back - Is There a Deeper Correction Ahead?

Gold prices finally hit resistance after coming within $12 of the psychologically-important $1,000 mark. Tuesday's $25 decline was said to be caused by profit-taking, and has some investors worried that a deeper correction is about to ensue. I am one of those investors.

I don’t anticipate that the decline will be particularly long or severe, but a healthy drop to resistance at $900 seems to be in the cards. Any way that you look at it, the downside risk is probably greater than the upside potential at this point in time. Gold will certainly break $1,000 this year, but we should keep in mind that gold is up over $300 or nearly 50% in the past six months.

Mainstream investors are still not buying the metal, gold is still not dominating headlines and thus, it is unlikely that we have reached the blow-off stage that takes gold past its inflation-adjusted high of $2,100. While all of the fundamental reasons to hold gold are still in place, I anticipate a few pullbacks from the $1,000 mark before gold breaks decisively through it, and charges to new highs. Unless Chavez invades Columbia or Bush invades Iran, we are likely to see further price declines, and a short period of consolidation between $900 - $950. At the same time, the short-term trend channel shows that further upside is possible.

We have made minor adjustments to the Gold Stock Bull Portfolio, locking in profits as high at 100% in key metals stocks, and reallocating those funds towards short selling key sectors of the U.S. market, and overheated emerging markets. Even if the metals continue higher, this move was necessary to re-balance our portfolio, and we will look to reallocate towards junior producers.

In the meantime, here is a brilliant clip discussing a new round of government gold confiscation, and the proposed Bush coin.

Comments

[Bhakta:]

I agree the support is at $900 for now, but whether there is enough fear to take us back down to that level now, I am not certain.

2008 Mar 06 11:19 AM

[Chuck:]

They'll only grab my Gold from my Cold, Dead Hands.

[ Hey, it's satire, folks.... yuck it up !!]

2008 Mar 06 12:43 PM

[Don-100:]

I agree that gold (as well as silver) will correct soon. I am long both. But rather than sell off my positions, I've elected to put in trailing stops. It is just too difficult to judge when the top has been hit. So, I'm willing to let the market tell me. Yes, I will not get out at the top. And yes, I did not get in on the bottom. But I'm now positioned to take one hell of a chunk out of the middle. While my stops are now on the generous side (10% for gold and 14% for silver), I'll likely tighten them as we move towards May. Once the correction comes I'll be patient. I'll wait until gold and silver come closer to their 200 day moving averages. I'll also probably wait until their 50 day moving averages begin to turn up. While this guarantees that I'll miss the bottom, it also increases the probability that I'll buy into a true uptrend. Then, I'll buy in slowly. Bless the soul of whoever created low-cost online brokers that keep my trading costs down to an insignificant level. My very profitable education in precious metals came from this free website: www.zealllc.com/essays.... They do sell a newsletter for about $119/year, but it is not necessary in order to understand their method and learn from their analysis. It does require effort to read through their weekly essays, but they are truly terrific. Out of guilt, I finally started to buy their newsletter. Hey, I was making an annual return of many hundreds of times the cost of the newsletter WITHOUT purchasing it. Morally, I just couldn't keep trading on the knowledge that I gained from their weekly essays without purchasing the newsletter, which has helped somewhat to improve my returns. Good luck!

2008 Mar 06 05:27 PM

[Golden Oxen:]

I would like to make the point that gold has no resistance now since it is at all time highs. Also with regards to your remarks that Chavez or an Iran invasion are the only things that could make them go higher, they are just silly. The Fed is dropping interest rates at the fastest rate in history, the dollar is collapsing to new lows, inflation figures are running away on the upside, we have an imploding financial system, and you are only worried about Chavez. Get serious and remember gold is not for trading

2008 Mar 06 08:34 PM

[Manitas de ...:]

Good point Golden Oxen. Taking profits now could be very dangerous. Then what, sit on depreciating cash? I took short term profits on the move in silver from 12 to 14 and had a very difficult time getting back in while waiting for the correction that never came. No doubt, the metals will shake out severely, but then getting whipsawed by silver is easy. Remember the words of Pigeon from "Reminiscenses of a Stock Operator" " It's bull market!" time to reread that chapter. Better to sit on your hands and be up 100% in a year then overtrade and get shaken out.

2008 Mar 06 10:20 PM

[Panama Red:]

Hey Jason, don't bogart that joint my friend, pass it over to me. You really are over-reaching more than you need to. I have a crystal ball and can assure you that there is a 50% chance you are right and a even larger chance that you are wrong. Roll another one, just like the other one.

2008 Mar 06 11:06 PM

[Golden Oxen:]

Manitas, i know exactly what you mean sir. Have outsmarted myself many a time also. Remember, "It's a bull market isn't it."

2008 Mar 06 11:58 PM

[sbenard:]

Deutsche Bank has just started 3 new gold ETNs. One is a short trade, the second is a double short trade, and the third is a double long trade. They have some advantages over the existing ones (GLD, IAU) in that they buy futures collateralized with 3 month Treasuries. The treasuries add a few percentage points of profit, even on the shorts. Also, since there is no gold owned like the others, the storage costs of the gold are non-existent. The new ETNs have only been trading about a week. I have been researching them, so I thought I'd share this little bit that I learned. Best all!

2008 Mar 07 12:22 AM

[sbenard:]

Oops! Forgot the tickers:

DZZ
GDZ
DGP

I have affiliation with DB whatsoever. I just like the ETNs they've developed!

2008 Mar 07 12:23 AM

[sbenard:]

Double oops! Should have said I have NO affiliation with DB. Can't figure out how all those typos sneak into my typing. :)

2008 Mar 07 12:25 AM

[Bhakta:]

I have taken a jump into the new DGP. It looks like a good place for GOLD bulls to park some funds.

2008 Mar 07 03:28 AM

[EE:]

Paper promises instead of the in fist metal will get more dangerous as the prices move up. see investmentrarities.com read Butlers last 4+ comments. Silver will out perform gold big time!

2008 Mar 07 09:26 AM

[David Lentz:]

The way that oil has cruised through the $100/bbl mark tends to make me believe that gold could also sail past $1000/oz in a very similar manner.
Or not ...

2008 Mar 07 01:41 PM

[Jason Hamlin:]

Comments appreciated. I don't claim to have a crystal ball and I have certainly outsmarted myself plenty of times before, but I don't see it as silly or misguided to take some profits off the table after a huge run. I sold half of my shares in PAL and they proceeded to drop 20% in the next few days. I feel fairly confident that I will be able to invest the proceeds at lower costs in the coming days. Besides, I always maintain a larger core position and trade/lock in profits in a smaller part of my portfolio. Trailing stops are another reasonable approach, but I've had success with my strategy. And don't worry about the joints being bogarted joints Panama Red, we can smoke two joints before we smoke two joints and then we'll smoke two more.

Best of luck to everyone in these markets. Buy and hold is certainly a viable strategy. Buy GDX, SLV, GLD and take possession of some physical metal, then go about your life and check back in a few years. But if you are interested maximizing your profits via trading, viewing my portfolio of junior producers and tracking when I am buying or selling, you can subscribe on my site. goldstockbull.com

2008 Mar 07 03:04 PM

[Malkiel:]

"All the fundamental reasons to hold gold are still in place"??

You mean all those instances in the last 12 months when gold was supposed to go up but went down instead? Like last April's big market swoon, or the inflation of commodities over the last half of the year, or the collapse of the dollar? Gold doesn't have any valid fundamentals any more because it's always held in leveraged form now and ends up being dumped at discount to meet margin whenever there's a crisis. By the time you get to $2100, which is what some of the other gold bugs were predicting for LAST YEAR, inflation will have dropped your investment back to current value. Even Indian weddings aren't reliable for raising the value of this most worthless of commodities any more...

2008 Mar 07 06:07 PM

[Jason Hamlin:]

Malkiel,
Not sure if you noticed, but gold is up 50% in the past 6 months. I am invested largely in Canadian stocks, which also reap the benefit of currency appreciation. But even if you were in dollar-denominated gold stocks and lost 10% to inflation, that is still way better than you could have done with just about any other investment over the past year. Are you suggesting the Dow or Nasdaq would have been a better place to invest? Sorry, but your analysis just doesn't add up and yes, all of the fundamental reasons to hold gold are still in place.

2008 Mar 09 07:24 PM