Is the Gold Correction Over?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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Gold has had a sharp sell-off that has took it down over $100 in four trading days from December 3rd to the 8th. The rally that began in early October took spot gold up $200 from the breakout point of $1025 to a high of $1226. Approximately 50% of that was lost by the afternoon of December 8th in New York Globex trading. The $1125 level was tested again the next evening at 2AM New York time in Hong Kong trading. A 50% drop is a key Fibonacci retracement for rallies and a common place where counter moves stop. The next Fibonacci support level would be around $1100 for spot gold if the $1125 level doesn't hold.

Other technical considerations necessitated spot gold's drop to at least the $1125 level. GLD, the largest gold ETF, had a gap on its chart just above the $110 level (it represents one-tenth of an ounce of gold and it trades at a slight discount to the spot price). That gap got filled on Tuesday. It is very common for price to trade down to the bottom of a gap, so this move was not unexpected. GLD then bounced off its 30-day simple moving average. It slightly pierced the 50 RSI level, something it also did in its last sell-off. The 50 level should be acting as support. Only a few trading days previously GLD was overbought on the RSI on the daily charts and this condition was mostly resolved on Friday, December 4th in only one day of trading. GLD was also overbought on the weekly RSI and this is also now mostly resolved, but it looks like a few weeks of back-and-fill sideways trading will still be necessary.

While sharp corrections are unnerving to investors, they are common in strong bull markets. The bigger picture is still very positive for gold and for silver. Not only is there no technical damage on the daily charts, GLD is on a buy signal on both the weekly (intermediate-term) and the monthly charts (longer-term) and so is SLV, the major silver ETF. When in doubt, investors should always consult longer term charts for guidance and remember that in bull markets, pull-backs are opportunities for buying.

When contemplating what to do in a sell-off during a rally, investors should also ask themselves if any important negative major changes are taking place. For the moment, the answer to that is no for gold. Are governments going to stop their super easy money policies or budget-busting stimulus plans? Don't hold your breath. Just yesterday both the U.S. and Japan both announced new stimulus plans. Just today, the U.S. announced that the TARP program would be extended to October 2010. The proverbial government printing presses are still in 24-7 operation and will be for some time. Gold investors will be one the prime beneficiaries of these policy moves.

Disclosure: Long gold and silver

NEXT: The Common Roots of Hyperinflation

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.