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« Northern Rock: Let it fail! | Main | Gold Prices and Gold Stocks Correcting »

Correction Fully Underway, Buying Opportunity Approaching

In this market, the inverse relationship between gold and the US dollar is one of the most crucial aspects to watch. Recently, gold was overbought and the US dollar was oversold, so some form of correction beckoned as we told readers of and subscribers of The Gold Prices Newsletter.

Gold 16 Nov 07

From the chart above one can see what a precarious position gold is in at the moment, from a technical perspective. It is worth noting the health of the technical indicators. On the MACD the black line has dramatically broken through the red, which gives us a bearish signal. The same has happened for the STO, as that technical indicator also heads south. The Relative Strength Index was severely overbought at one point, and although it has now dropped off to a more reasonable level at around 50, it could still fall further. When one takes a look at the position of gold in relationship to its basic moving averages, the overbought situation becomes even more apparent. Gold prices are a good $25 from the 50 day moving average line and $95 from the 200 day moving average line. It is to be expected that gold should fall back to the 50dma or even the 200dma in this correction. The 50dma appears more likely at current, as the 200dma is nearly $100 away, but remember this is gold and anything is possible.

The US Dollar 16 Nov 07

We have long seen the “80 level” as the last hope of support for the US dollar and in this last July we dubbed the area below 80 as “The Abyss” that the US dollar would fall into after towards the end of the summer. Sure enough the USD broke 80 in early September and it hasn't looked back. However, although we are extremely bearish on the US dollar, we think that some sort of bear rally is due and as we told our readers last week. Since then the USD has made a bit of a comeback and some technical indicators have turned bullish, such as the MACD that is shown above. Although this rally may be a feeble one, it could be enough to trigger a correction in gold and put a cap on the surging gold stocks. This will present another good buying opportunity for investors and traders to take long positions in gold and gold stocks.

The correction in gold stocks appears to be a step ahead of the actual gold market, with the HUI already dropping back about 10%.

HUI 16 November 07

The STO looks as if it could turn bullish very soon and indeed the correction in gold stocks appears to be significantly ahead of gold itself. In terms of technical support areas, 400 is a key level for the HUI and should it not find support at 400 then 360-370 would be the next stop. However the HUI is not as overbought as gold, its much closer to its moving averages and so a sizeable portion of the correction in gold stocks in probably behind us.

So although gold has further to fall, in our opinion a good buying opportunity in gold stocks is rapidly approaching. We will inform our readers of any opportunities that we see in The Gold Prices Newsletter which you can subscribe to completely free of charge, just click here and enter your email address.

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