Gold Into Correction/Consolidation Mode
Gold corrects. It consolidates. That's what an item does when it's in a bull market trend. Gold has been in a bull market since around 2000.
If you look at a chart of gold from 2000, you see it go up. Along the way you see corrections. Nothing goes straight up forever. So now gold is correcting, or consolidating, depending on our point of view. Either way, that's normal bull market actions.
Recently, gold became "overbought." That means that it's price rose far beyond its 50-day and 200-day moving averages. When you see that, you know that an item is overbought and one of two things will happen. It will either meander for a while until its averages catch up with it, or the price will drop to its moving average (or sometimes below). This is perfectly normal action for an item in a bull market. So far gold has followed that pattern.
When an item drops, we typically call it a correction. When it sort of meanders within a trading range for a period of time, we call it consolidation. In the end, it really doesn't matter what you call it. The fact is, the price of gold "got ahead of itself."
Until we reach the third phase of this bull market in gold, we can expect corrections and consolidations in the price of gold. Since we're in the second phase of this bull market, each time the price of gold gets far ahead of its moving averages, expect a correction or consolidation.
Think of it this way: the bull is shaking off weak investors so the price can start rising again. The weak investors are the ones who figured they'd get in on a good thing and make some quick money. Bull markets - in their second phase - begin to attract these sorts. They notice the item going up and they want a piece of the action.
Some of these types are speculators. They'll maybe make some quick money trading gold. Either that or they'll lose money. Speculating on an item when it's in a primary bull market is usually a mistake. Even if you do make money, you wind up selling and watching the item shoot up and regret that you sold.
Some of these types are amateur investors who really don't understand what they're buying. They just see something going up and simply jump on board. They're not at all familiar with - nor do they spend any time finding out - why the item's been in a bull market. So they lack any real conviction. And at the first sign of correction, they panic and run. They sell - frequently at a loss, sometimes for a small gain. They're the ones the bull shakes off - as opposed to the speculators, who got in with the idea of making a short trade. When the bull shakes enough of these weak hands off, the price will start going up again.
So gold correcting (or consolidating) is just part of its bull market rise. No bull market makes things easy for you. You have to hang in there to get the full benefit of a bull market rise in an item.
The other thing that's important to know is that bull markets don't happen every day. If you're going to invest in a bull market and ride it, you have to keep you eyes and ears open not only to spot it when it begins (or close to the beginning), but also, to know whether it's correcting or coming to an end.
It would be really unusual - REALLY unusual, as in I've never seen it - for a bull market to end without having gone into its third phase (a subject for another post). Since the gold bull market isn't in its third phase (the wild, manic phase), but is in its second phase, investors in this gold bull market - the smart, sophisticated ones who got in early and have been riding the bull up - will probably just hang on.
Hanging on - even when you have the courage that comes with conviction - isn't always easy. But it's certainly the best thing to do if you're really in a primary bull market that still has strong legs.
So that's what I think is happening right now with the price of gold.
If you look at a chart of gold from 2000, you see it go up. Along the way you see corrections. Nothing goes straight up forever. So now gold is correcting, or consolidating, depending on our point of view. Either way, that's normal bull market actions.
Recently, gold became "overbought." That means that it's price rose far beyond its 50-day and 200-day moving averages. When you see that, you know that an item is overbought and one of two things will happen. It will either meander for a while until its averages catch up with it, or the price will drop to its moving average (or sometimes below). This is perfectly normal action for an item in a bull market. So far gold has followed that pattern.
When an item drops, we typically call it a correction. When it sort of meanders within a trading range for a period of time, we call it consolidation. In the end, it really doesn't matter what you call it. The fact is, the price of gold "got ahead of itself."
Until we reach the third phase of this bull market in gold, we can expect corrections and consolidations in the price of gold. Since we're in the second phase of this bull market, each time the price of gold gets far ahead of its moving averages, expect a correction or consolidation.
Think of it this way: the bull is shaking off weak investors so the price can start rising again. The weak investors are the ones who figured they'd get in on a good thing and make some quick money. Bull markets - in their second phase - begin to attract these sorts. They notice the item going up and they want a piece of the action.
Some of these types are speculators. They'll maybe make some quick money trading gold. Either that or they'll lose money. Speculating on an item when it's in a primary bull market is usually a mistake. Even if you do make money, you wind up selling and watching the item shoot up and regret that you sold.
Some of these types are amateur investors who really don't understand what they're buying. They just see something going up and simply jump on board. They're not at all familiar with - nor do they spend any time finding out - why the item's been in a bull market. So they lack any real conviction. And at the first sign of correction, they panic and run. They sell - frequently at a loss, sometimes for a small gain. They're the ones the bull shakes off - as opposed to the speculators, who got in with the idea of making a short trade. When the bull shakes enough of these weak hands off, the price will start going up again.
So gold correcting (or consolidating) is just part of its bull market rise. No bull market makes things easy for you. You have to hang in there to get the full benefit of a bull market rise in an item.
The other thing that's important to know is that bull markets don't happen every day. If you're going to invest in a bull market and ride it, you have to keep you eyes and ears open not only to spot it when it begins (or close to the beginning), but also, to know whether it's correcting or coming to an end.
It would be really unusual - REALLY unusual, as in I've never seen it - for a bull market to end without having gone into its third phase (a subject for another post). Since the gold bull market isn't in its third phase (the wild, manic phase), but is in its second phase, investors in this gold bull market - the smart, sophisticated ones who got in early and have been riding the bull up - will probably just hang on.
Hanging on - even when you have the courage that comes with conviction - isn't always easy. But it's certainly the best thing to do if you're really in a primary bull market that still has strong legs.
So that's what I think is happening right now with the price of gold.
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