Is The Gold Correction Over?

February 7, 2010 Gold Investment, Predictions No Comments

Is the gold correction over? That is the question of the hour. I will lay out the reasons why I think it may be getting close to the end as I try to answer the question, is the gold correction over?

Is The Gold Correction Over?

It is important to remember that in just 5 weeks ending in late October 2008, the HUI dropped 57.2% as the metals fell with the market in the wake of the financial crisis. No one predicted the financial crisis, except Jim Sinclair, and he did not call the date but rather said it was coming sooner rather than later. I certainly did not predict the meltdown that occurred in gold over those five weeks, but I treated the event as an opportunity to accumulate both quality gold stocks and gold bullion. History proved that buying while everyone was selling was the way to go because over the next 9 weeks, the HUI doubled!

Gold moved up to another all time high in December and then started to to correct for most of the last 8 weeks and the HUI followed gold down by 26.7% to date. The initial 17.6% leg down in early December mimicked physical gold decline. Then gold and the HUI turned up for a bit before starting the second leg down of this current correction.

The 2nd leg of this gold correction saw the 200 day moving average fail. Right now, in relation to the price of gold, the precious metals stocks have fallen to the levels they were last July, just before gold started on its 63.1% rise to its all time high in December. This is a huge buying opportunity in the gold market,that you just can’t pass up.

Now is the time to double down and get serious, because the next couple of weeks may be the last opportunity to accumulate gold at these levels!

Downside Risk from Here?

There is support at $1,050 and $1,025, followed by really strong support at $1,000. If $1,000 is breached, and I am not saying that it will, $945 would be the next stop. There are just too many things that are fundamentally wrong with the financial system and the dollar for this downtrend to go on much longer. Now is the time to stay the course, go against your gut and BUY! Gold is over sold and gold stocks are WAY oversold!

The Financial Fundamentals do not Support the current Dollar Rise.

Gold is going to turn around soon, because the current rise in the dollar is not supported by the underlying facts. Soon, the value of the US dollar in the financial system will be reconciled with the dollar in the broad US economy. Until and unless current policies are reversed, the outcome will be a substantially lower US dollar. THIS WILL LEAD TO PRICE INFLATION IN THE US, and higher prices for commodities subject to global demand, such as oil and gold.

The worst case scenario includes a further reduction of international demand for US debt and rejection of the US dollar as the world reserve currency. This would result in a hyper inflationary collapse of the U.S. dollar. Look for the Chinese to step in soon and pick up a lot more gold at or near the current bargain basement prices because they know that the dollar is going down dramatically and soon!

Gold to hit $1,350 – $1,400 by late Spring – John Embry

Speaking on the Mineweb Gold Weekly Podcast, Sprott Asset Management’s chief investment strategist says while the yellow metal is likely to continue to consolidate over the next few weeks, the next major move will be up.

Author:Â Geoff Candy
Posted:Â Wednesday , 03 Feb 2010

Gold should continue to consolidate over the next few weeks but, the next big move is likely to be up.

This is the view of Sprott Asset Management’s chief investment strategist John Embry, who says he is looking for the price of the yellow metal to hit around $1,350 to $1,400 by late spring.

Speaking on the inaugural Mineweb Gold Weekly Podcast, Embry says the recent downward trend seen in the gold price is nothing more than a healthy correction.

“Gold had a 300 dollar plus run in US dollars from July into the early part of December and it has come under heavy pressure subsequently. It certainly has engendered immense bearishness amongst the commentators which is actually good from my perspective. I think the fundamentals are undisturbed and as a result it is setting up for another strong buy.”

Asked about the link between gold and the US dollar, especially the recent strengthening of the dollar against the euro, Embry, says, while there is often a very clear link, the problems in the US and, by extension, the US dollar, are everywhere – especially given the huge budget deficit it is sitting with – so “the idea that one should run away from gold and into the US dollar because it is strengthening against the euro and several other currencies to me is actually preposterous.

“The idea that the US dollar is a safe haven today is flat out wrong,” he added, “and that is going to be one of the major factors that are going to change the perceptions in the gold market going forward.”

Another reason for Embry’s conviction about bullion’s next move, is the increasing role gold will play as a protection against monetary debasement.

“I think a lot of the world’s wealth is figuring out that we have little choice given the debt problems in the world and the resultant unlimited creation of money and so I think there is a solid investment bid in the market for gold.”

He adds, that concerns that have been raised about the possible impact the jewelery market is likely to have on the long term rise of gold because, he says, “all great bull markets in precious metals come from their reestablishment as money.”

The times they are a changing, and gold and silver will come out on top. Stay the course and use this time to pick up all that you can because you will need it in the years ahead.

Till next time, good luck and good trading!