Saturday, October 18, 2008

Fractals and gold correction

A lot of people invested in or thinking about investing in gold have been spooked by gold's recent performance, which has been relatively erratic. This is the nature of market corrections. They shake out weak hands/investors and create fear so that the next new bull leg can begin.

Take a look at these two charts below, ignoring the dates and price levels and focusing on the shape of the chart pattern.

The top chart is a gold correction in 2004 and the bottom chart is the ongoing 2008 gold correction. Now you know the concept of fractals, or patterned fragments that can sometimes give clues as to what comes next. To put things in perspective, here is a long-term gold price chart using a log-scale. The two corrections shown in the charts above are circled on the chart below.

Will these patterns result in the same post-correction outcome? I don't know for sure. What I do know is that we are in the middle of a healthy bull market correction in gold that sets the stage for a new all time high in the gold price. We could correct for another year or start taking off next month, but corrections are a great time to buy for investors, as they are breaks in the price action that allow you to buy low so you can sell high later.

The gold price fluctuates just like the price of all assets that are traded. However, make no mistake about it - gold is in a long-term bull market and stocks and real estate are in a long-term bear market. Gold going up, stocks and real estate going down. Once the price of one ounce of gold is about the same as the price of the Dow Jones Industrial index, I will sell most of my gold and buy stocks and some real estate. Until then, buy gold or stay in cash as a longer-term investment strategy and stay the hell out of the stock market.

Wikinvest Wire