March 10, 2006

The Predicted Gold Correction Is In Progress

Now, for the Good News...

Last week, I predicted that gold seemed ready to slip into a typical springtime correction. The price had become range-bound, unable to mount a serious attack on its recent highs. And the rallies it had managed to put together required substantial support from geopolitical headlines — support that could not be relied upon over the long term.

Thus, I closed my commentary with a warning and a promise:

“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.”

It appears that the correction has come in March. Right now, in fact. And, if history is any guide, this year’s version of springtime malaise will last into early- or mid-summer.

But, as I promised, there’s a good news side to this coin, and that is the exceptionally bright longer-term outlook for gold and gold equities.

You see, the Fed’s long campaign of rate hikes is ending soon, if it hasn’t already. While the masses are all caught up in speculation over what will happen at the next FOMC meeting, we should be a bit more far-sighted. We need to recognize that, under virtually any scenario, the Fed will have taken their collective foot off the brake by early summer.

Why do I say that? Because the Fed can’t afford to let the cure kill the patient. The whole purpose behind the campaign was never to combat inflation, but rather to deflate the real estate bubble.

Mission accomplished, and then some: The sound of hissing air is growing ever louder...yet the lagging effects of the rate hikes will continue to impact the real estate market and property values for many months to come.

Already, the economic recovery is in danger. Further rate hikes run the very real risk of suddenly popping the real estate bubble, which would in turn tank the U.S. economy and risk a deflationary spiral.

This is something the Fed — including newly installed Chairman “Helicopter Ben” Bernanke — will not risk at any cost.

So whether there are two more rate hikes, or just one, or simply none, matters little. Because the campaign is ending, and the primary pillar supporting the dollar will be removed...at about the same time as I’m predicting gold will reach its seasonal bottom.

And when that happens, I expect the investing masses, with gold’s late-2005, early-2006 rally still fresh in their minds, to begin plowing back into gold and gold stocks.

In the meantime, I plan on picking up some real bargains as this correction deepens. I suggest you do likewise.

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.