Is Gold’s Correction a Buying Opportunity?

October 20, 2010 | By | Reply More

Gold IngotIn previous articles we have suggested that any significant correction in the price of both gold and silver should be considered a buying opportunity. Is now then the chance to top up on our holdings that we have been waiting for? The question we are attempting to answer is whether this current correction has further to go and if so, how far will prices fall?

Precious Metals are Still In a Bull Market

That gold and silver and, with some reservations, Platinum Group Metals (PGMs), we believe are in a long term bull market still remains our mantra and is the basis for our own personal investment decisions.

Profit Taking May Prevail For Some Time

In very broad terms we are trying to evaluate the consequences of the declaration by Tim Geithner that it is not policy to devalue the dollar while at the same time another round of imminent quantative easing (QE) still seems favourite.

Amongst other factors the possibility, if not probability, of a substantial fall in stock prices that have, in the last few day, shown signs of gathering weakness, causing a flight to liquidity that, amongst other results, will drive investors to cash in their precious metal profits and so put further downward pressure on their prices.

Will More QE Push Up Stock Prices?

More QE may result in a further run up in stock prices if that has not already been taken into account. Last but not least of our considerations is yesterdays’ strengthening of the dollar after weeks of unmitigated doom that pushed up gold and silver to record prices and is now encouraging further profit taking.

Conflicting Technical Indicators

The technical outlook is also confusing with significant overbought signals being prevalent for a good few weeks into precious metals march to new all time highs. Despite this the usual assortment of indicators have hardly spoken with one voice in the short to medium term although we cannot see any signs that the long term bullish outlook is under threat.

However we have never made it a secret that we have little confidence in the art of charting to foretell the future. In our opinion it is only in the short term that the indicators can be deemed at least a rough guide with only moving averages, volume, and just a few others giving signals that we consider relevant to our investment strategies.


Reports that South Korea are exchanging their dollars for gold, growing problems in the Middle East putting oil supplies under threat coupled with producers unhappy about the weakening dollar, the growing civil unrest particularly in France and spreading throughout the Common Market countries is hitting the Euro in favour of the dollar. These and so many other factors as yet unresolved leave our decisions in limbo.

If we do decide that this pullback is a buying opportunity, whether for the GLD or SLV ETFs or miners, we will be looking to insure ourselves against any substantial losses in the shorter term by buying relevant put options.

Long term we have no doubts that excessive inflationary pressures will result in both gold and silver enjoying a long march upwards and onwards, but not without these zigzag moments that can be so unnerving.

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