The Volatility of the Gold Price Does Not Subside

After the minimum of 1,321 $/ounce in mid-April, the rebound stopped at 1,487 $ on May 3rd and then started to fall again and threaten to make new lows.

Gold prices

At the same time, more and more banks and operators are setting new downward targets, predicting falls of up to $1,000/ounce. Note that these are the same institutions that were targeting $3,000 in the summer of 2011 when gold exceeded $1,900.

technical situation

As mentioned in our previous article, the mid-April panic severely damaged the technical situation of the chart which now needs time to adjust.

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Fibonacci Retracement

No one can say at what point the decline will stop. It could stop at the previous low and then make a double bottom, or it could drop to test the 38% Fibonacci retracement at $1,285, or even retest the 2009 breakout at $1,050.

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Market Correction

Even in the previous big rally in the 1970s, there was a 50% correction. After going from $35/ounce to $200 in four years, it dropped to $100 and then began the super speculative phase that saw it reach $880/ounce in the following three years.

 

It is therefore necessary to have a balanced approach to investing in gold, bearing in mind the fundamentals that have made it grow in the last 12 years.

Four factors can help us minimize extremely negative views:

1- Gold cannot be printed anymore

The Federal Reserve, the Bank of Japan, the Bank of England, and others are printing new paper money at rates never seen before in human history. Today there are more than 100 billion dollars a month to buy government bonds and other financial instruments. This generates a currency war in which we are all soldiers. Gold has a strong correlation to central bank balance sheet expansion.

2- Gold is seen as a currency by central bankers

In 2012 central banks, mainly Asian and Brics bought 525 tons of gold for foreign exchange reserves, and these price corrections are seen as opportunities to increase reserves at low prices.

3- Negative real rates

The monetary policies of the central banks on zero point interest rates and "official" inflation at 2% continue to guarantee negative "real" rates. Investors around the world are desperate for yield. This is generating financial bubbles in stocks, government bonds, corporate bonds, and junk bonds. When they try to sell to take a profit, they will find the exit gates clogged causing panic in the markets. Gold could be a safe place to invest.

4- Corrections happen, but they offer to buy opportunities

The violent crash in April could go down in history as a "sigma" event. The April 12-15 decline exceeded 2.6 standard deviations year-over-year. A very rare event. Finally, the correction continues also in May. Fundamentals remain supportive while technical analysis does not. Under these conditions, the best strategy is to continue to accumulate every month with a long-term objective without exceeding volatility tolerance thresholds.