Gold Correction - I'm Not Worried

Gold investors get nervous every time a correction materializes and gold fails to add another $20 every week. The “barbaric relic” crew comes out of the woodwork to denounce precious metals investing and proclaim that the commodity bull market is over. These are likely the same experts that have called a bottom to the financial and real estate markets every week for the past six months.

I enjoy technical analysis and enjoyed coloring as a child. I hold them in similar esteem. Nevertheless, let’s color on the gold chart, and see what stories are told:

First, take note of the longer-term trend channel in blue. This channel has been in place since late 2006 on this chart and with a few minor outliers, holds true all the way back to April 2004. This is the channel that should be of most concern to gold investors, not the manic channel (green) which was an anamoly caused by a prolonged period of consolidation (black box).

Consolidations within long-term secular bull markets can be thought of as springs being coiled. The longer the consolidation, the more potential energy is stored and the more explosive the next upleg will be. This phenomenon and technical set up was pointed out in previous articles and unfolded as expected. It is interesting to note that the latest upleg lasted almost exactly as long as the previous consolidation.

The current correction has brought the gold price to the bottom trend line of the manic channel and upper limit of the long-term channel. Whether gold bounces off the bottom trend line and continues with an accelerated price advance or drops back into the long-term channel is anyone’s guess. But what is important to note is that although the recent correction was painful for many gold investors, it is healthy and completely within the scope of the longer-term projection.

In fact, the bounce of the Fibonacci 61.8% retracement level ($900) is quite bullish and if it holds, could see gold remain in the manic channel and push back towards $1,100 in short order. However, if the $900 support fails again, we will see $850 in a heartbeat. This level represents not only the 50% Fibonacci retracement, but also the bottom trend line of the long-term channel. It is very strong and very important support.

So there is no reason to be antsy or worried at this particular juncture. Gold is catching its breath and will either return to the explosive growth of the past few months or return to its long-term channel for a more orderly advance.

I have maintained my core position, but am waiting on the sidelines with extra cash. In the short-term, I will look to buy as gold pushes towards $950 or sell if $900 support fails. Either way, my mind is at ease, and yours should be too.

Comments

[OJO Zafado:]

I already own the GDX and bullion. I am thinking of a diversification into DXKSX. There are some major anomalies in these markets. Inflation is clearly a problem. The Fed actions have created some wierd effects. You can typically get 7-8% on A1-Aa3 investment grade subordinated long term debt a prices below par, while the medium term bonds of the same issuers are yielding 3.75-4.75%. Municipal bond & TIP funds like PMX & WIA Iare kicking out 5.75%. This is a very ominous sign for the longer term effects and sustainability of recent Fed actions. It would seem we are very near the bottom in short and medium term Gov't debt rates. There is a "Basket" precious metals fund that trades in London. Here the closest thing that seems available is the DBP that holds ~20% Silver but no US traded funds have shown up? for trading the basket with the other precious metals including platinum, palladium, molybdenum, rhodium, etc. Anyone have a recommendation?

2008 Apr 08 09:32 AM

[Dan Schmeidler:]

Stay diversified. Stay Long Gold.

2008 Apr 08 02:26 PM

[highlarche:]

My largest position is in gold ABX GG GLD my second is SLV HL GFI. When gold hit 1000 and silver hit 20 I had told myself that I would liquidate these positions. However when that time came I elected to stay and actually increase my positions during the 10% selloff of which stocks got hit by 20% or more. My conclusion is that silver is going to at least 30 and gold to 1500. In addition I find GFI to be cheaper then Gld. Who cares if the mines are shut down for a year or two, its as good as in a vault underground. Let it sit while higher prices are there. Gfi is the cheapest way to play gold.

2008 Apr 10 09:31 PM