Here it is, yet, another explainer. There is nothing to see folks. Gold was overextended and it entered a correction period. These corrections can go from 33% (in the March-October period of 2008) to 9%.
The garden variety is a 13% correction from top to bottom.
The current correction will find strong resistance at the 50 SMA which would put it among the group of soft corrections at 7.5%. If gold failed to bounce at the 50 SMA the next level of support is down 8% from here. Yup. You guessed right, another 13% correction.
Every single trend from the 10 day to the 500 day is up in gold, and both Positive Volume Index and Negative Volume Index indicators point to great crowd enthusiasm in buying gold.
As you may know, I consider gold as just another trade instrument, and careful following of the market may make the difference between making money and ruin. In this vein, I don’t believe in investing exclusively in physical gold as the buy-sell spread can take easily away a good chunk of your profits if there are no willing buyers.
Back in 2008 I wrote that I expected this up move in gold (The Case for Gold as the Next Bubble Instrument (and How to Play it Safe)) and since I wrote that article gold moved up 37% (not without first correcting down 26%).
Back in January of 2008 I said that “2008 [was] going to be a flush year (they will try to make us sell our houses for cheap, our stock for cheap, etc.).” And it was indeed, I don’t expect right now a similar correction in the gold market.
If gold bounces at the 50 SMA, the next upswing will be of around 12%, if it bounces after a 13% correction, the next upswing will be of around 22%. I am in no rush to buy at this point as we may even face an evil correction of 20% with strong support at 1,000. I will be checking where the bounce seems to be confirmed and I may be adding to my position then.
In the meantime, enjoy the chatter and the vagrancies of the golden market.
Update on May 27
Gold bounced but it may be a fake. I am on the fence for now. I was waiting for a more meaningful bounce, and this is not it. I would like to see one more leg down and a bounce before adding to my position.
This article is part of the series "Documenting The Hyperinflationary Genesis"
- Bernanke’s creative solution: Let’s do it again
- At a financial crossroads
- How to survive hyperinflation
- Let the party begin. We will be dead tomorrow
- I have $ 100,000,000,000 and yet I can’t retire
- Is the Dow Jones at a new high?
- Stagflation: This Time It Is Different
- The Myth Of Gold as Inflation Hedge
- Is Gold a Hedge Against Excess Liquidity?
- Disposable Personal Income Shows Disturbing Historical Trend
- Things That Go Bump in the Night
- Greenspan: Give Homeowners Financial Aid: Financial News – Yahoo! Finance
- Black Swans, Bell Curves and Stagflation
- The Gold Scam
- And Now They Tell US
- Some Historical Perspective on the Current Recession
- Gold Correction Seems Over
- Gold Chatter
Franklin @ May 22, 2010