With the sharp and sudden drop-off in the price of gold this week, many investors are left wondering whether we've finally hit the end of this rally, or whether this is just a market correction, with more left to come.
First, let's look at the fundamental facts. What has changed? Has any of the uncertainty left the markets? Are economic reports exceeding expectations, or consistently failing to meet them? Has the Dow recovered? How about the European borses? Have the troubled EU states balanced their books, or are they announcing (like Greece once again this morning) that they'll need further help from their neighbors going forward? The Japanese Prime Minister has resigned, and Denmark's is scheduled to make an important press conference regarding elections today. Has the threat of inflation in the future subsided? With many speculating that Bernanke will hint at another round of quantitative easing (the so called QE3) during his speech at Jackson Hole this week, I doubt it. All of these factors should continue to fuel demand for gold going forward.
Looking at the supply side, not much has changed there either. As someone who frequently deals in large quantities of bullion, I can tell you that most banks have waiting lists of buyers, even the ones in Switzerland. Most smelters have waiting lists as well - meaning the gold already has buyers when it comes out of the ground, before it is even melted down into bars! And the amount coming out of the ground is a constant which doesn't increase as the demand does. About the only way to get your hands on any significant quantity of gold these days is to form direct relationships with the mining companies themselves, and even then you might find yourself waiting in line.
Now let's consider the technicals. First of all, what the recent drop truly unexpected? Looking at the chart below, you will see that it was actually foreshadowed by a divergence (price made a higher high, while the momentum indicator underneath failed to). Price then found support at the daily 21 exponential moving average - right where it should have. This feels like a technical correction, nothing more - and nothing to really panic about. Maybe an opportunity to add to existing positions, or perhaps open new ones.
Gold loves round numbers. History shows us this again and again. The number 2000 has been tossed around so much in financial media lately, that it is almost an inevitability at this point (the only question, really, is when). Using our Fibonacci projections, we can actually pinpoint that target number even more precisely - to 2027.27 - but I do expect some strong resistance at 1900, both due to the round number, and the potential for a double-top. What happens there will tell us whether we're going to 2000 sooner, or later.