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 6 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 of 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.
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