The correction under way.

I discussed the possibility of a sharp correction in precious metals (Dec 6, 2010). The first graph is gold prices as of Jan 3, 2011. We see a parabolic/hyperbolic convergence of prices indicating a breakout coming. The second graph shows the actual breakout on the down side. The third graph shows the same thing in the silver prices.

Gold and silver have entered what promises to be a short-term bear market, as the drop is already more than 10%. In any bear market, the questions that arise is how deep and how long before it turns around. Most of these moves go by the Fibonacchi numbers of 33, 66. Gold rallied from 1150 to 1455, or $300/oz. A third retracement would take gold to 1,350 and a two thirds replacement would knock it back to 1,250 an ounce. Current price is 1,329 so we are into the second leg of the downward move. In fact, I expect a bounce upward this week.

In the realm of gold and silver miners, the story is somewhat different. Silver miners have been hit harder than gold miners (silver moves faster than gold), but some gold miners have resisted the downward move. I have a hunch that the strongest gold miners (those ripe for takeover like NAK, THM and NG) may in fact be taken over by the majors, which will create a bear market rally in these stocks. Why would the majors move now? Because they have had good earnings and the next upleg of the gold market promises to be violent and steep, pushing the juniors way up. The best price is now. NAK has been moving up lately, even though gold is in a short bear.

We then have the question of WHEN? When will the bear market in gold be over and gold price take off on the upside? That is harder to answer. Momentous things are happening and they will all converge on affecting the gold market. The yuan will be revalued upward, the Stock Market will have a steep correction and the idiots will recommend buying bonds. Interest rates, inflation and gold price will all be heading higher. Most of these will take decisive turns in the next six months (counting from Jan 1).