Friday, April 3, 2009
Food for (happy) thought
Corrections can be boring and frustrating when you have taken a directional position. Gold is in correction mode right now. People are starting to get quite bearish on gold, including traders I respect like The Financial Ninja and that evil speculator Mole. Day-trading aside, I think gold is in a bull market and any surprises will be to the upside. The current correction in gold is not unusual. Here, let me show you.
Below is a current daily chart of the gold price over the past 18 months:
Now, here's a roughly 11 month daily chart of the gold price from the end of 2003 to the end of 2004:
Not all that different, eh? You can probably guess what happened next...
Now, I am not expecting some dramatic move in gold to $2000/ounce here. I am in the deflation camp and think gold will retain its value and rise a little bit over the next year. I'd be happy with a quick spurt to $1100 to allow $1000/ounce to become the new psychological floor/support for the gold price instead of it being psychological resistance. Gold is for safety and acts as a cash equivalent. The hyperinflationists may well be right eventually, but deflation comes first. Gold can rise right along side the U.S. Dollar and has many times before during this gold bull market, but neither will make you rich unless you play with dangerous degrees of leverage.
Gold miners are for getting rich quick and will leverage the expanding profit margins caused by a stable to mildly rising gold price while costs fall. Wait and see what happens to gold versus other commodities after this spring rally is over. Gold will hold up (again) and commodities like oil will get spanked lower (again). Gold miners will make a routine correction in their new cyclical bull market while general stocks (and most commodities) will make new lows.