Gold Enters Correction Mode (2)

Wednesday was a big down day for gold and the gold stocks. Both broke below important support levels, as noted in my July 20 post below. Yesterday gold and gold stocks bounced and I got a number of calls suggesting that the correction was over…another one day wonder.

In my previous post, I warned that the gold complex would have trouble going down with all the dip-buyers primed to do exactly what they have learned to do over the past few months. But the bounce was not such a good one. Gold was impressive, recovering the Wednesday loss and closing back above support. Gold stocks did not. This sort of divergence is usually a good indicator that there is more downside to come.

Besides, does anyone have a clue out there what a correction is? To be a correction, a dip in price actually has to correct something. What corrections correct is foolish enthusiasm, over-optimistic expectations and excessive risk-taking. That hasn’t happened yet and won’t until a large number of investors throw in the towel and provide a good entry point for fresh money. Corrections have to hurt.

If the average player is still buying the dip, there has been no correction. We have to see Uncle Mike selling the dips instead.

The extreme performance in equities since the Brexit vote tells you that safe-haven investments like gold are no longer in vogue. Why shouldn’t gold lose its safe-haven premium and revisit its pre-Brexit $1250 level? Other assets have.

After the Brexit vote, the market consensus was that the Fed would not be raising rates for years. This thinking has now reversed; new all-time record highs in equities and small improvements in the economic data in June/July have moved rate hikes back into the picture, resulting in a firmer dollar.

Indian and Chinese demand is weak as these key markets typically are slow to pay higher prices.

Bottom line? Be patient, just as I advised two days ago. So far, this is playing out pretty much as expected. In my opinion, better buying opportunities likely lie ahead, dear reader.