Gold Tumbles But Doesn't Fall Out Of Long-Term Bullish Trend

Even with the recent correction in gold prices, gold has been trading within the long-term trading range. According to one expert, gold overshot on the upside when gold prices began trading over $1,900 an ounce. Last week was just a market correction for gold and there is nothing to worry about.

Addison Wiggin, Contributor
9/27/2011 @ 3:04AM

September Gold on the COMEX traded as low as $1,562 Monday before recovering to $1,623 at the close. That’s still a $50 loss tacked onto Friday’s $100 loss.

Even examining the action in the context of a one-year chart, it looks dramatic…


As of today, people who want to trade gold on the Comex once again have to post additional margin to their accounts.

Fueling the drop on Friday was an announcement by Comex parent CME Group: Gold margins were rising 21%. In addition, silver margins were raised 18% and copper, 16%. An initial position on a 100-ounce gold contract will cost $11,475 up front. This is the third margin increase for gold since August. Put together, the increases have totaled 55%.

The Shanghai Gold Exchange is following the Comex’s lead and raising margin requirements on precious metals.

“Even with the recent correction,” comments Byron King, “gold is still priced within its long-term trading range” — as evidenced by this chart:


At $1,500, gold would remain within the “channel” that’s been in place for nearly three years. Such levels correspond to about $150 on the SPDR Gold Trust (GLD) ETF.

“We overshot on the upside when we went over $1,900,” Vancouver veteran Marc Faber told CNBC. “We’re now close to bottoming at $1,500” — the bottom of the aforementioned channel, as it turns out. But, “if that doesn’t hold, it could bottom to between $1,100-1,200.” Not that Faber is worried. He’s been buying in since gold was near $300.

So here’s a little historical perspective: Gold first broke through $1,000 in March 2008, touching $1,010 briefly. That turned out to be a high point that it wouldn’t exceeded for 18 months.

By November, the panic of 2008 was in full swing, and gold was at $715. That’s a 29% drop. By September 2009, gold had reclaimed $1,000 and didn’t look back.

“With history as our guide,” says Matt Insley at Daily Resource Hunter, “it’s clear that gold’s been doing this sort of thing all along its massive run-up — since 2005 it’s seen five similar corrections.”

So what now? Are we in line for another $29% drop… which would take us to $1,350? Or something steeper, as Marc Faber warns about? Will it take another 18 months for gold to reclaim the old highs and break through $1,900?

The good news is that you don’t have to know the answers to these questions to continue feeling confident about holding gold. “Nothing has changed since last week in the physical gold market,” Mr. Insley continues. “There wasn’t a mother lode discovery, and there’s clearly no substitute. So other than a market correction, gold is still high on our list of investable resources.”

“I’d buy every month a little bit of gold,” Faber advised back on Sept. 6, when gold was at its (for now) all-time high of $1,921. “When you buy gold, it’s an insurance against systematic failure and problems in the financial markets.” Of which we still have plenty.

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