February 27, 2006

Range-Bound

Unless gold really gets moving soon, it risks falling into the typical, seasonal pattern of a lasting springtime correction.

Gold is in a critical period right now, one in which it has to prove itself, or suffer the consequences in terms of price.

There’s no doubt that the market was boiling over in late January, and we weren’t very far into February before the inevitable correction came. It hit hard and deep, with gold dropping nearly $20 on the first day, and a couple of subsequent days showing $10 and $15 losses.

But those sell-offs were punctuated by days when gold gained as much as $15 and, even when the metal was losing ground, the selling was orderly. Holders were reluctant to let loose of their gold, shorts were quick to cover, and new buyers were eager to bargain shop. So, gold began climbing back. Not all the way, mind you, but appreciably back along the upward path it had recently traversed.

As I write this, however, gold appears to have stalled, remaining locked within a fairly tight trading range. And this is worrisome, because — as I have often stated — a market that fails to rise must fall. Markets do not stand still, especially a market like gold, which is so strongly guided by emotion. If gold doesn’t began a concerted attack on its recent highs...and soon...trend-following investors will begin sidling to the sidelines.

Other ingredients to add to the recipe for potential trouble include the dreaded seasonal pattern of a springtime correction (which I’ve recently detailed for readers of my publication, Gold Newsletter). Add in the fact that gold has required some heavy lifting by geopolitical turmoil in Nigeria, Iraq and Saudi Arabia to support its price recently — with no help from longer-term economic developments — and you get very real cause for concern.

So will this recovery fail, with gold beginning a correction that will extend into the summer and shave 10% to 15% from the price? Or will economic trends, speculative buying and Asian physical demand reemerge to spawn yet another rally?

My view is this: Whether it comes in March, April or May, we are going to see at least one more major correction in gold.That’s the bad news. Next week (I promise!), I’ll report some good news....

Brien Lundin is the editor and publisher of Gold Newsletter, a publication that has ranked among the world’s leading precious metals and resource stock advisories since 1971. To learn more, visit www.goldnewsletter.com.