A 10% correction in gold is a good thing

March 20, 2008

Everybody knows a parabolic rise leads to a parabolic decline, the occasional correction is welcome because it helps prevent unreasonable growth and often presents a valuable buying opportunity. The gold chart is replete with 5% and 10% corrections that are quickly erased a few weeks later.

1 year gold chart - March 20 2008

In a bull market, violent corrections on the downside are normal and expected, they are designed to scare out speculators and leave behind only the long term investors. If the new bottom is higher than the last bottom, it’s an indication the base of long positions has increased and the rally should continue.

Predicting when corrections will take place is not a simple task, I certainly won’t profess to any notable short term trading skills, which is why maintaining reasonable expectations and focusing on the long term picture is much less stressful and often much more profitable.

Apparently, what sparked this latest decline is the Federal Reserve’s decision to cut internet rates by “only” 75 basis points. On any other day that would have been a good news story for gold, but since many people were expecting more, in this case, it wasn’t.

I have no idea how much of this decline is real and how much is contrived by market manipulators trying to save the global fiat monetary system, but what I do know is that infusing a massive amount of money instead of monstrous amount of money is still infusing too much money. If someone is dumping gold on the market in a deliberate attempt to pop a fictional commodities bubble, they will only impoverish themselves and cause the price of all commodities to rise even higher should they ever try to recover their lost property.

However, in all likelihood this is just a normal correction in a long term bull market. Use it to strengthen your positions. Nothing has changed.