Merit Market Update – The Gold Correction Pattern – July 28th, 2010
Posted: July 28th, 2010 under Market Updates.
Gold traded lower this morning, hovering near the bottom of yesterday’s trading range. At $1160.50, it sits about $1.10 below yesterday’s close, erasing the slight gains made in last night’s overseas market. With this week’s selling, gold has broken through the key support level around $1185, and may be setting a new trading range below the $1200 per ounce mark.
This is a very significant occurrence, as it is only the second major correction (of more than 7%) of 2010. As seen in the trade volume which has increased dramatically with this sell off, the lower cost of gold is attracting new buyers into the market who have been on the sidelines over the last couple months.
Corrections of this magnitude have been important milestones in this bull market, as they tend to mark the best buying opportunities seen for months at a time. With gold having posted major gains in all of the last 9 years, it has been difficult to find solid entry points into the fast moving market. Looking back over the last two years, corrections of 7% or more have represented the best possible times during which to buy gold, based on the near and mid-term gains that have followed. See the charts below for reference.
Graphs courtesy of www.kitco.com
January 2009: Gold corrected 7.4% to $810 per ounce. Within about a month it had run back up to $989, giving investors a return of about 22%.
April 2009: Gold corrected 9% to $870. Within 60 days it was at $975, returning over 12%.
July 2009: Gold came down 7% to $908, then ran almost straight up through the end of the year, topping out at over $1212 per ounce, setting a new all time high and posting an increase of 34%.
January 2010: Gold corrected 8% to $1078 before then increasing some 17% to $1237 by May.
July of 2010: With a correction from $1260 to current levels, gold has come down about 8%. The previous four corrections having been followed by an average return of over 21%. If this pattern holds true, the next uptick for gold could put the price over $1400 per ounce.
This being the second largest correction we have seen since January 2009 (the only larger one saw a slide of just 9% compared to the current 8%), and with support at the $1160 level, there is a strong argument that this could be the best entry point into the market so far this year. Though there is clearly some downside risk, especially on the tail end of such a slide, there is one fact that most investors are pointing to regarding the price of gold: All of the economic conditions that drove gold to these high prices are fully intact, and don’t seem to be changing any time soon.
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