After making a new all-time high above $1,900, gold has plunged by $170 or roughly 9% in the past few days. Many factors have been blamed including the CME margin hike of 27%, money moving back into stocks or simple profit taking by funds to rebalance their portfolios after such a strong move. Others point to the routine take down of precious metals just prior to futures/options expiration.
Whatever the cause, this dip is likely to be short-lived and I fully expect a quick rebound in the coming days. The fundamentals continue to improve, central banks continue buying huge amounts, China and India’s demand grows unabated and gold could find technical support around the $1,750 level. If it drops too far below this level, gold could easily test strong support at the 50-day moving average of $1,625.
Short term predictions are folly, but I tend to think gold will find support well before $1,625. After being in overbought territory since the start of August, the RSI has returned to the centerline. While technically there is still room to fall, the last time gold corrected this much following overbought readings, it found support at the centerline.
Growing demand has been creating dips that are both shorter and less severe. Many of the ‘weak hands’ have strengthened and the demand is coming increasingly from long-term investors versus short-term speculators. Many newbie gold bugs are learning what the old timers have known for some time – the dips are nothing more than buying opportunities in a long-term secular bull market that is far from over. When others panic and sell, smart money steps up and buys at discounted prices before the next upleg begins.
This has happened like clockwork for the past decade and the trend will continue for some time into the future. Participation in the gold market remains anemic and both metals are still far from their inflation-adjusted highs, which I view as a minimum price target before this bull is done running.
The debt crisis occurring worldwide is not happening by chance. The system has a built-in design whereby the debt burden grows increasingly painful to the point where the banks and money-printers are able to accumulate and concentrate much of the worlds wealth and resources in their hands. In short, the debt can never be repaid, so real tangible assets are pledged by desperate countries in exchange for worthless fiat paper or via threat of violent force.
It seems that the fiat money system is destined to end in either default or hyperinflation, while the middle class vanishes and the gap between the rich and poor mushrooms wider. While it is hard to predict exactly when the breakdown will occur, it feels more imminent each day. I would like to think that our leaders might suddenly realize that the great Keynesian experiment has gone horribly wrong and return to fiscal discipline and sound money, but I am certainly not holding my breath.
I am buying this dip with both hands, picking up physical metals and select oversold mining shares. If you would like to see which stocks I am holding, receive alerts whenever I buy or sell and get my monthly contrarian newsletter, sign up for the Gold Stock Bull Premium Membership.