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January 12, 2011

Gold's Correction Isn't Done

My last few public blog posts have focused on equities, so I thought it might be time to slip in a word on the asset class I trade most: precious metals. Gold has been mired in a sideways chop for three months, and on net, has gone exactly nowhere since mid-October. However, several factors suggest we will see a somewhat deeper correction before the next big rally kicks off. The first clue comes from the nature of intermediate-term corrections since the 2008 low:

Daily gold chart with moving average

With the 150DMA about to move up through $1300, the hope of many gold bulls to see a back-test of the $1265 breakout does not seem very likely to be satisfied. Nevertheless, gold could very well experience another 5% pull-back as it works it way into its next intermediate low which, according to my analysis of gold cycles, should occur sometime between late January and mid-February.

We can also see that gold mining shares have worked off a bit of their late-2010 exuberance:

gold miners bullish percent - stock market indicator

This indicator was a major factor, along with an ageing intermediate cycle, for my rapid exit from most precious metals positions in early November. Bullish percent for the gold miners should drop below 50 before the current correction completes, and if the equity market manages to unfold its now-overdue correction, we could easily see this indicator in the 20-30 range.

Despite the endless fundamental reasons to own gold, from a trading perspective a little more patience appears to be prudent before a new entry is made.


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