The latest SEC investigation of Goldman Sachs has brought down most asset classes, including gold. Of course this makes no sense whatsoever, since the secular bull market in gold is driven by factors outside Goldman's packaging of esoteric securities to unsuspecting investors. However, short-term moves often defy logic, and it is the job of the long-term investor to block out day-to-day noise.
Technically, gold is consolidating once again after failing to sustain a breakout above $1,160. Support lies at $1,130 and $1,100. Below $1,100 support lies between $1,070-$1,080. Gold is still trading above its 30-day moving average, so the technical damage of Friday's sell-off was minimal.
On a fundamental basis, the sell-off on Friday was a dream come true. Keep in mind the rhythm of bull markets- consolidation, breakout, consolidation, breakout. As a long-term investor, prolonged periods of consolidation are to be welcomed with both hands. A basic rule of technical analysis states that the magnitude of the breakout is proportional to the period of consolidation. Viewed in this light, gold bugs should be praying for an extended consolidation period.
Now let's think logically for a second about the repercussions of increased regulatory scrutiny of financial institutions. Although most people with a brain know that Government Sachs has been operating a crime syndicate for years, there are obviously people who live in a constant state of oblivion. As more allegations of wrongdoing come to light, the general population will lose confidence in financial institutions and the government, since the government failed to identify fraud as it was happening. This is all to be expected in a cyclical move from paper assets to hard assets.
Gold will benefit from the growing distrust of the government. We are in the middle of a long-term cyclical bull market in gold, and the truly explosive moves lie ahead. Patience and discipline are the name of the game moving forward.
Gold is still flying under the radar and investors are still hesitant to buy. The window of opportunity to accumulate is closing, so investors should be focused on accumulating right now. However, how many people will actually buy at these levels? We all know most people have trouble buying gold above $1,000 dollars since it is so "expensive." Ironically, these are the same people who will be waiting on lines around the block at gold shops to buy above $2,000 dollars. Human nature is a funny thing.
This article has been republished from Moses Kim's blog, Expected Returns.