Is it Time to Buy Back Gold?

We’re surprised. We expected an uncomfortable correction in gold. While it has quickly fallen as much as $110 a share that’s only a correction of about 9%.

There has been some discomfort. We like how it pulled back to its 20 MA, tried to reverse, and failed. The 10 and 20 MA’s are normally the first support areas for price in an aggressive uptrend. Gold had ridden its 10 MA since breaking out of its second minor correction in October. Twice previously it had found support at its 20 MA and traders reflexively sought to buy it on this most recent visit. The failure of the setup, which we expected, confirmed our suspicions that bullishness was so rampant the correction had further to go. We expected a break of the 50 MA before a reversal, which would be sufficient to scare out a lot of weak and late holders.

But frankly the news flow worries us. Normally when a correction occurs bearish arguments hold sway and cast doubt in investors’ minds. It causes many to question their thesis for being long in the first place.

But over the last few days the news has been nothing but bullish for gold. Shall we count the ways?

President Obama has announced yet another stimulus plan, even in spite of an economy that appears to be turning around. He is clearly panicked about losing his majorities in Congress in elections next year and believes massive spending is the only way to turn around employment sufficiently to spare his party from losses.

The Japanese have announced yet another in a lengthy list of stimulus packages dating back to the early ‘90’s. President Obama should pay heed. These stimulus packages have done nothing but make Japan the largest debtor nation on earth and undermined its currency. Japan has been in and out of recession for nearing twenty years.

Peripheral European economies are on debt watch, including Greece and Spain.

All of these items simply serve to underscore to investors the lack of credibility of the world’s major fiat currencies. Where do investors seeking refuge from the storm turn? To gold, of course.

Technically gold is due for a correction of 20% or greater over a period of a couple months. But the news flow argues that investors should be on guard to reenter this trade sooner. Today price put in a doji candle, the second reversal setup in three days. The last one failed. Given the news flow this one might not.