Gold Is Correcting, When To Buy?

Wed, Nov 17, 2010 - 3:10pm

After sporting a testosterone-like surge in price since late July, both gold and silver are taking an ebb from their flow. You may think me mad or even throw a four-letter word my way if you're new, but I'm excited. I want to buy more precious metals, and I want to buy them at the best prices possible.

I've run the following charts before, but they've been updated to show the recent surges and corrections in our favorite metal. The perspective these charts offer is quite useful since they can help us spot a bargain.

First, let's look at the recent surge in the gold price to see where it falls in relation to other climbs. This chart shows all the major surges in our current bull market (greater than 5%).

The latest surge, peaking at ,421 on November 9, represents a 22.8% advance from its July 28 low (the far right bar).

The average of all advances is 23.5%, so our recent surge is about average. It may have felt bigger than that, but in the context of the secular bull market, it was nothing out of the ordinary. There have been six surges greater than what we just experienced, and if you believe, as Doug Casey does, that we're in for a mania at some point, our biggest surge has yet to be logged (for reference, in the Mania Phase of the last secular gold bull market, the yellow metal rocketed 128.5% from October 8, 1979, to January 21, 1980).

Convinced as we are that the current correction is temporary, when might be a good time to start buying more? This next chart shows all of gold's major corrections in the current bull market.

Since 2001, the average correction in the gold price is 12.8%. Based on our recent high of $1,421, a 12.8% correction would take the price to $1,239.11. As of Tuesday's London PM fix, gold is down 5.7%, which you'll notice is smaller than any of the pullbacks logged on the chart. That doesn't mean we couldn't go sideways before heading back up, but it equally implies a further drop shouldn't be surprising. Matching the smallest correction of 6.6% would drop the price to $1,327.21.

I've read a couple gold bears forecasting that the price will fall into three figures again. Yet even if we matched the biggest drops of 27.7% in this correction, the price of gold would be $1,027.38, still above the $1,000 mark.

You'll also notice some correlation between the two charts; namely, the bigger the surge, the bigger the pullback. The two biggest surges preceded the two biggest corrections. Since our recent surge was about average, I wouldn't be surprised to see this pullback scoring average as well. Which, based on a straightforward average, gives rise to the potential for gold to fall all the way to $1,239.

If, however, you lob off the price extremes – of the two smallest and the two largest corrections – we come up with an average of correction of 8.74%... which would take gold to $1,297, a more likely “worst case” scenario, should the metals correction continue.

That said, as nothing has changed in the fundamentals, with falling confidence in the ability of the world’s largest nation-states to pay off their massive debts in anything other than debased fiat currency units driving widespread interest in gold and silver, this bull market still has a long way to go.

And the correction, as modest as it has been in the historical context, may already have moved the metals back into the buying range for many who have been waiting on the sidelines, waiting to add to positions. If so, then the firming we’re seeing today could signal the correction may be coming to an end.

If the slide continues, however, we’d be looking to add to positions in tranches between $1,327 and $1,298. Tomorrow we’ll update the numbers for silver.

About the Author

Senior Editor, Casey's Gold & Resource Report
info [at] caseyresearch [dot] com ()