Wednesday 7 November 2012

DON'T FEAR THE RECENT GOLD CORRECTION

Don't Fear the Recent Gold Correction 
By Matt Insley, Contributing Editor, Money Morning 

Over the past 28 trading days gold dropped more weight than a Jenny Craig model.

Sure, the shiny stuff can probably fit into a smaller pant size. But the bigger problem, when it comes to apparel, is the shiver this recent pullback has sent down the britches of gold bugs - indeed, gold's US$100-move in a month is nothing to sniff at!

Today we'll look at three possible explanations for this downward movement - and some added insight for gold's next move...

There are plenty viable reasons why gold is pulling back, today we'll cover the three most pressing...

Gold's Technical Drop

Back on May 16th of this year the outlook for gold didn't look good on a chart. After hitting an all-time high above $1,900 in August 2011, gold started on a descending journey - settling in May below $1,550.

From there, prices consolidated and traded in a tight window around $1,600. That's when the recent rubber band "snapback" rally kicked in and propelled the metal towards $1,800 -hitting a high of US$1,791 just last month.

Prices have since pulled back.

To a chart-watcher this could signal trouble. Since hitting a high over $1,900 in 2011, gold has made three subsequent runs at the $1,800 mark. Each time failing to break above the psychological threshold (on a daily close basis).

If you look at the one-year gold chart you'd see this triple try. Each time the metal failed to break through the $1,800-mark it was punished with a subsequent $100 downturn. 

Nov 2011: Rally to $1,795, subsequent drop to $1,598
Feb 2012: Rally to $1,781, drop to $1,540
Oct 2012: Rally to $1,791, drop to $1,690

Looking at the most recent downturn on a 30-day gold chart, there was a methodical stair-step lower. 

With each passing day, traders discounted gold's probability to head higher and thus, on a short-term basis, gold sold off. After all, traders want short-term profits and if it's not likely that gold will bust above $1,800 and on to higher-highs...they head to greener pastures.

That's where things stand today. So from a technical, chart-watching standpoint gold's dip could be as simple as that. I can hear it now in the pit... 'Three strikes and you're out!'

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