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January 17, 2011

Gold Correction Update

Since the mid-week review of the ongoing precious metals correction in which further weakness was anticipated, gold has shed another $20, and silver has pulled back to test an important pivot. I expect a bit more selling to weigh on PMs, but I also believe the low may not be far away, time-wise. As noted in the previous post, all four of gold's intermediate cycle corrections since the 2008 liquidation have found their lows right on the 150-day moving average. If the same moving average were to hold the current decline, another $50-60 of downside is implied.

Gold Daily Chart

Gold's price pattern has the look of a rounded top, and I'm sure droves of bubble-callers are watching that neck line for a break. Unfortunately for them, gold is nowhere near bubble status, nor will this apparent rounded top prove to be a top at all. Gold has formed many such topping patterns over the course of the bull, and all of them have failed to stop the price rise. This one will be no different.

Silver also sports a topping pattern which I believe actually has a chance of reaching its projection, though as with gold, the bull market will not be over.

Silver Daily Chart

We all know that precious metals correction often end with a panic sell. A quick, $3 drop by silver should be sufficient to shake off riders and turn sentiment bearish enough to support a new rally.

One should also note that gold miners bullish percent has almost retreated far enough to support a bottom, as well.

Gold Miners Bullish Percent

Bullish percent certainly could drop a lot further, but once below 50%, the door is open to finding a low.

The price declines described above could occur very quickly, and such declines will not only fool bulls who don't believe precious metals can fall much further, but also those who don't think the bottom will be found anytime soon. If gold is flirting with its 150DMA while silver is testing $25... and especially if price drops to those levels quickly, I intend to be a buyer.


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