Monday, September 26, 2011

Gold - Crash or Correction?

What a sharp and fast drop in the last week for gold.  As of mid morning on Monday, gold is down 12% (silver is down a whopping 30% !). Which brings up the question is this a crash or simply a typical correction in the decade long gold bull market? 

Taking a step back and looking at this move in the context of gold's longer term trend, John Roque provides some data and comments that puts this recent drop in perspective.
For every year from 2002 to 2010 gold has, at least, corrected to its 40-week moving average and been down, peak to trough on average 15.6% (see table).” He adds, so far gold is down 12% from its early September high. Support @ 1600 looks ok to us.  

Roque makes the observation that that in every year since 2001 when gold bottomed,
it has worked through consolidation phases. So far this recent sell off looks like it is in keeping with it's consolidation phase pattern.

Barry Ritholtz offers an additional technical explanation: 

When a trend channel has a parabolic breakout to the upside, the prudent thing to do is to peel off 10 or 20%. This sort of vertical spike works itself off by falling back to at least the prior channel.

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