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Gold made a huge run from $650 to $850 during the back half of 2007. After this run, gold corrected and consolidated around the $800 level and support at $790 proved to be a very solid floor from which the second run was launched that took gold from $800 to over $1,000. Fast forward to 2008 and gold’s most recent correction has seen the price fall back to this very important floor once again. On three separate occasions during the past month, gold has tested this support level and has bounced off with vigor. We also see in the chart below that gold’s stochastics have bottomed and are turning up. From a technical point of view, it looks very much like gold has found its floor.

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Fundamentals are also pointing toward higher prices, as we head into the Indian wedding season. The latest statistics are showing extremely robust gold sales, with imports up 45% during August. But it is not only India that is showing signs of surging demand for the precious metal, Abu Dhabi reported gold sales were up 300% during August. We also have news of significantly lower supply coming out of the world’s largest gold producers. Rising demand and declining supply always equals higher prices.

With inflation out of control and the dollar extremely overbought, I anticipate a rally in precious metals and energy over the next several weeks. With the economy coming out of a consolidation phase and looking ready to continue downward, we should a powerful spike at funds rush back into commodities and out of financials, housing and blue chips.

I admit to being caught off guard in terms of the severity of the recent correction. It seems likely that the government and banks are colluding and using paper contracts to massively short precious metals and drive the price down. They don’t want to see an alternative currency gaining popularity and a rising gold price confirms fears that inflation is much more severe than their statistics suggest. Ted Butler’s “Smoking Gun” article is recommended for more on this topic, as is Jason Hommel’s “Tribute to 7th Grade Math.”

I believe the gig is up and that market forces will pull precious metal prices back to levels dictated by true supply and demand. Shorts will need to be covered and huge sums of money will be looking for a “safe haven” as more banks fails and the U.S. economic decline gets worse. Now it the time to buy both gold and silver and realize significant profits as the prices bounce back just as forcefully as they declined.

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