Friday, December 18, 2009

Gold Drop Presents Opportunity To Buy At A Discount

The $100 drop in the price of gold presents an opportunity to buy at a discount according to Chris Weber from Daily Wealth who sees the recent fall as a temporary price correction within a bull market. While gold could easily fall below $1,000, the correction may mark the interlude before the next phase of growth. See the following post from Daily Wealth.

I'm very happy to say that of all my thousands of readers, I've gotten zero letters from people worrying, much less panicking, about the recent fallback in the gold price.

As of December 15, gold was $1,126, exactly $100 below its record of December 2. By that time, gold had really begun to "go parabolic." I happened to check the spot price during the early hours of that day, and, when I saw the price at $1,225, a sort of shudder, a frisson, went through me. I've always gone by my instincts, and they have always served me well. So when I get feelings like this, I pay attention to them.

On September 2, I sent my subscribers a special alert. I had an instinct that gold, then at $964, was about to break out to a new bull leg up. From $964 to $1,226 is $264, or 27%. And that is a lot for a major asset to increase in just three months.

To put the recent gold move into perspective, here's the price over the last year:

You see that from the end of February 2009 to early April, gold fell from $1,000 to $895. That was a 10.5% fall in just over a month. So far, as I write this, gold has gone as low as $1,110. From the recent high, this is 9.46%. It could go lower: These things happen in a bull market. They serve to throw people off the bull.

Go a bit further back than one year. Over the past 13 months, gold has soared from $692 to $1,226. That is a huge rise of over 77% from late October 2008 to early December 2009. In dollar terms, the rise was $534.

I bring this up to maybe calculate how low gold can go on this correction. Normally, a correction within a bull market can retrace the bull move by 50%. And 50% of $534 is $267. Subtract $267 from $1,226 (or add it to the low of $692), and you get $959.

Yes, gold could easily correct back below $1,000 and still be in a long-term bull market. However, its pullbacks since the bull market began have been very mild, compared to the big one during the last bull market several decades ago.

Here is a 10-year chart of the gold price:

Long time readers will remember that I expected the correction in gold that began in March 2008 – the first time it rose above $1,000 – to be deeper than it actually turned out to be. We only have the bull market of the 1970s to compare this one to, but in the 18 months from the start of 1975 to the middle of 1976, gold lost 50% of it prior gains.

The correction that began in March 2008 saw its low just seven months later, and the fall was from $1,030 to $692, or just 33%. And after that low, gold bounced strongly back to $1,226 just 13 months later.

This means that so far we have not had anything like the big correction that we saw during the '70s, a decade that saw gold rise overall from $35 to $850, or a huge 2,330%.

No one can tell in advance how long this recent loss will last. It may just be another temporary rest like the one we had last March. It may be longer and take gold back below $1,000.

My own gut feelings, which are not all that strong on this issue, are that we've already seen the gold correction that lasted from March to October 2008 and took gold down by one-third. I don't think this one will be nearly as big. It may take a few weeks or even a few months, however. The ardor of the past few weeks about gold has to be cooled down a bit before the next phase can begin.

To me, gold started to sprint during the last three months. And no sprinter can go on forever. He has to rest, to exhale. After that, he can continue his run.

One thing is for sure: Gold is finally giving people who have not bought a chance to buy. It may go back below $1,000, but I wouldn't wait for this to happen before buying. We may have seen the lows. Trying to time purchases is not at all easy.

My advice is just to take advantage of the recent near-10% discount from the peak and acquire some, if you haven't already.

This post has been republished from Daily Wealth.

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