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After putting in an impressive performance the much awaited gold correction is upon us. The real question now is when it will be over and when the secular bull will resume.
Since the stock market has been pushing higher, gold is back to being the old anti-dollar trade. The dollar has gained about 6% against the Euro in less than a month.
Check out this video on gold’s current correction. Personally, I would draw the Fibonacci levels based on the low in April, not October as Adam does. Based on that the 50% correction from the top would bring us to $1045:
Turning to sentiment, the Hulbert Gold Newsletter Sentiment index (HGNSI) started to show that the tenacious gold bulls have given up for the most part. As a result of the correction from $1200, newsletters that time the gold market have reduced the exposure they suggest to their readers from +54% to just +11%.
To put that in perspective, previous corrections have recently corresponded with the HGNSI at -18% to +9% (and an average of -7%). For more details see this article by Mark Hulbert. It is more accurate to compare today’s correction to recent ones in the past few years because if we go back to the early naughts then the scale has to be reset. For example, in late September 2001 the HGNSI plumbed the depths at -67% and even lower at -78% in the summer of 2002.
Of course, these were very different times. Gold was trading at $250-$300 with everyone except for very, very few viewing it as a relic of the dark ages with no relevance to today’s modern world. Even so, the drop off in the recent HGNSI is promising but its reading of +11% is not yet low enough to signal the end of the correction. As well, any analysis of gold sentiment can’t ignore this take-down from Jon Stewart and the deal offered by Prescott Financial.
Also, don’t forget that we are still enjoying positive seasonality in the gold market which started back in September. That will last until February 2010.
While the major support resistance line remains at the round number $1,000 level, based on sentiment, the Fibonacci level, the fact that we are in a strong secular bull and the seasonality tail winds, I wouldn’t be surprised to see prices hold firmer than they would otherwise during this correction.
Then again, every single significant correction has taken gold to its long term trend line (200 moving average) or below it. Right now, it stands at $990 and it is moving up rapidly. So that’s another vote of confidence for the $1000 support resistance line.
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