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Gold: The Pre-Announced Correction

|Includes: SPDR Gold Trust ETF (GLD)



This is the daily chart for GLD, the gold ETF, (click to enlarge) with a blue area highlighting the effect the announcement that the Indian central bank had bought 200 tons of gold from the IMF had on the stock back in early November. If you remember, that particular piece of news is what powered the latest lunge upward in the price of gold. The possibility of a gold rush among the emerging countries' central banks and a corresponding gold price explosion made everybody a gold bug for a whole month and GLD went from around 104 to around 120.
Gold's meteoric rise was finally dealt a serious blow on Friday, suffering a 6% correction on extremely high volume. In my opinion though, the blow was neither decisive nor that significant , at least not yet - the trend is still up and nothing in the technical picture is suggesting a trend change yet. Friday's better-than-expected employment report and the dreaded possibility that Bernanke's Fed might start hiking rates sooner rather than later (don't hold your breath) catalyzed a correction that was inevitable sooner or later because sentiment was way too optimistic and gold extremely overbought. It wasn't a question of "if" and "why" but a question of "when" and "by how much".
I can see this correction continuing for a while until both the exuberant sentiment and the overbought price action are relieved a bit. Should GLD get anywhere near its 50-day simple moving average sitting right now at around 106.50 - which happens to be slightly above where it was before the Indian purchase was announced - I would be a cautious buyer. Why cautious? Well, because one should always be cautious in the financial markets. More specifically, long gold is such a crowded trade that any corrective move, once started, could overshoot. And there is a lot of empty space between the 50-day and the 200-day moving averages (the 200-day MA is at 95.76 as of this writing). In other words, go small and/or use stops.
Disclosure: Long gold.