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posted on 07 March 2016

Gold Correction Likely

Written by

Special Report: The Coming Correction In Gold and Gold Stocks

I recommended buying the gold ETF (GLD) and the gold stock ETF (GDX) on December 30. In the Gold Update on February 5 I said,

"Sometime in 2016, GDX has the potential to trade above $20.00, so let that be a guide in terms of how aggressive you want to trade."

gold.bars.999

In my monthly commentary Macro Tides, which was published late February, I noted that GDX had traded as high as $19.85 on February 24, and gold had traded up to $1,263.90 on February 11. I thought it was likely that gold and GDX would exceed these price levels before a more meaningful correction developed.

Image

On Friday March 4, gold did exceed its high of $1,263.90, trading up to $1,280.70. GDX traded up $20.87, before reversing and ending the day down .55%. Despite the higher prices there are negative momentum divergences, which means the upside momentum is beginning to wane. This is usually a warning sign of an impending high in prices.

According to the Commitment of Traders report as of March 1, the trend following 'dumb' money is almost as long gold as it was last October, just before gold dropped from $1,180 to under $1,080 in less than five weeks. Large speculators were long 152,413 contracts in the March 1 report compared to being long 157, 434 contracts last October. More importantly, the 'smart' money, producers and the commercials, increased their short positions, and are now more short than they were last October. (producers -112,667 contracts vs. -102,946, commercials -171,431 contracts vs. -165,848) Since gold subsequently rallied from $1,240 to $1,280 after this report was tabulated on March 1, I would guess the smart money increased their short positions as gold rallied.

Image

The loss of upside momentum, the price patterns in gold and GDX, which indicate that a 5 wave rally may have completed, and the positioning of the smart and dumb money in the futures market suggest that gold and the gold stocks are near an intermediate high.

End of the Bear Market but Expect a Retrenchment Lower from Here

That's the bad news. The good news is the strength exhibited by gold and the gold stocks strongly suggests that the bear market from the highs in September 2011 is over. The recent rally represents the first leg of a new bull market, which may have ended at $1,280. A correction of 50% or more of the rally from the low of $1,046 is probable during the next few months, before the next phase of the new bull market in gold and gold stocks kicks into gear. In other words, gold and gold stocks may endure a correction of the recent large rally, with gold falling back to $1,160 - 1,180, and GDP dropping below $17.00. The coming correction will shake out the weak hands that jumped on the band wagon in the last few weeks. And if, as I expect, the dollar index does rally to a new high in coming months, it would likely pressure gold, especially after such a huge rally.

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