Gold’s plunge below $1600 per ounce caught many market
participants by surprise wondering if the bull market for the yellow metal has
ended. For those that understand the
gold market and the fundamentals underlying the 10 year bull run the answer is
a resounding no.
The charts may show a lot of technical damage as gold has pulled
back to test its 50 week moving average retracing the entire summer run despite
the continuing problems in Europe and Washington DC.
Just a few short weeks ago six major global central banks,
in a coordinated move, cut swap rates and extended maturities which set off
alarm bells around the world. Market
participants quietly wondered if this was the cover for a bailout of a global
financial institution.
The downgrades of seven global banking powerhouses last week
in addition to rumors that the Commerzbank in Germany may be the subject of a
government bailout did not help soothe the markets.
The dichotomy between the fall in the price of gold and the
continuing global banking problems indicate that one or the other will break.
The first quarter for gold is known historically for its
strength and 2012 should prove no exception.
The problems in Europe remain unresolved with leaders now hoping for a
comprehensive solution to be finalized by the end of March.
Historically, gold has not moved up in a complete straight
line, instead moving in spurts followed by periods of sideways trading lasting
more than a year. Corrections during
this period of sideways trading typically range around 20% and with gold now up
over $1,500 the corrections become magnified in terms of numerical
significance.
As shown by the chart below, the most recent move was the
longest of the bull market lasting 21 months and a break is needed in order to
consolidate before moving higher.
The first quarter rally may not take us to new highs but
this period of consolidation will set the stage for the next move up.
The first four moves up for gold averaged approximately 50%
and the last move almost doubled the price meaning that the next move will
likely take us close to the $2,800 level.
Get ready folks, with major money center banks being
downgraded and European nations put on watch the stage is being set for
fireworks in the coming years.
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Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
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