FWIW, here is my take on the current Gold market:
Had you visited SOH for only a mere 10 minutes, you would most likely be very well acquainted, and perhaps even indoctrinated in the compelling reasons and merit of owning Gold. If you still don't get it, you can always ask our in house Gold guru, the illustrious "Dutch" (aka Market Sniper), he will be more than happy to fill you in, and bring you up to speed. If you don't want to bother Dutch, listed below are Eric Sprout's 17 reasons to own Gold:
1) Gold is returning to its historic role as money
2) The inevitability of a collapse in the USD
3) Other significant world currencies offer no refuge
4) The destruction of government balance sheets & zero interest rate policy lead to hyper inflation
5) The true impact of malign side of derivatives have yet to express themselves
6) Investment demand for Gold is accelerating, but we are only in the early stages of this phenomenon
7) Many paper gold products do not have the gold backing they purport to have
8) Mine supply is not anticipated to rise for years, if at all
9) Central Banks are reaching an inflection point, where they will no longer be able to supress Gold
10) Increasing likelyhood of accelerating purchases of Gold by eastern central banks
11) Increasing skepticism about U.S. Gold reserves
12) Large short positions
13) Increasing recognition that Gold prices have been seriously suppressed
14) The supression is evident in the continued undervaluation of gold
15) The relative small size of the Gold market
16) Gold is in an established powerful bull market
17) Gold has endured
For more detail on the 17 points see: http://www.sprott.com/docs/Reports/reasons_to_own_gold.pdf
I for one, do find the above 17 reasons to own & hold Gold most compelling. I would also include several additional alarming reasons; The current fear of yet another stock market melt down within the span of less than 40 months, The lack of political leadership in DC, The imploding European debt crisis, The ongoing instability of the Arab spring.
So why the title & picture associated with this article?
Well, I would definitely agree that we are in a Gold bull market for the ages, however even the most powerful long term upward sloping trends can and usually do have significant corrections along the way. I do believe we are about to enter the danger zone.
The following data shows the largest Gold corrections in the past five years:
This chart shows the extent of which Gold is currently over bought on a purely technical basis:
It is hard not to notice the parabolic nature of the move during the past few weeks. On a technical basis, Gold has broken way out of a 3 year bull channel, and is now miles away from its 200 DMA. According to Adam Hamilton, "once gold rallies so far so fast that it stretches 25%+ above its 200dma, it is unsustainably overbought and an imminent correction is due. This last happened back in early-December 2009, when gold had “only” surged 15.1% in 30 trading days to hit 1.248x relative. What happened right after this surge to very-overbought levels? Gold immediately corrected, falling 12.6% over the subsequent 9 weeks into early-February 2010."
Overbought simply means a price has rallied too far too fast. It has nothing at all to do with absolute levels. Gold at $1800 might be perfectly reasonable given its global fundamentals, and its price will probably be considerably higher by the end of this year. But over the short term, in the coming weeks or couple months, gold will likely face some serious selling pressure after such a super-fast advance. These post-spike sell-offs are purely psychological and are totally unrelated to fundamentals.
What will be the catalyst to kick off the long overdue sharp correction? Well, one of the following might light the fuse; A sustained rally off of the oversold lows in the stock market, The initiation of a credible effort to restructure the U.S. budget, An announced attempt at a real resolution to the Euro debt crisis, The Bernanke says no to QE3, The imminent departure of Daffy Duck from Tripoli.
And finally, the piece de resistance, Evil Plan 5.0. An all out effort will be undertaken by the PTB to suppress Gold. A series of CME margin hikes will be implemented, combined with simultaneous black pool selling from their TBTF banking agents. All done in order to reinforce the evil notion that Gold is not a store of value, but just simply another very speculative, highly volatile commodity………….heheheheheh
Disclosure: My views may be completely biased, as of last Friday, I am the proud owner of 200 GLD September puts at 160 strike.
BDI Idiot Savant from Athens, Greece