Spot gold was trading higher on Friday. Overnight, the market traded its highs for the day as strong physical buying out of Asia gave the market a boost. The market did however, give back a very large portion of the gains throughout the trading day Friday.
Although bullion prices are closing near their highs for the week, it certainly is cause for concern that prices could not hold above the $1400 level. Part of this could be due to low volumes on a Friday, but in any event it is worth noting.
This week has been one for the record books in gold. From Sunday night’s open through the rest of the week, the bullion market was filled with activity as gold picked up where it left off last Friday. The selling was swift and extremely severe, and left many would be gold bulls in the dust wondering what happened.
Stories have run rampant of various conspiracies and other such explanations for the massive sell off. We will leave people to form their own conclusions. What matters now is not where gold has been but where it may be going. It has always been amazing how a market and its investors can go from being so bullish to so bearish. This has been the case with gold.
Many investors are now bearish on the metal, and that could prove to be a good contrarian signal. Although this sell off was frightening and caught many people off guard, it is not the end of the world. And contrary to popular opinion it may not be the end of the gold bull market either.
As a matter of fact, this recent drop represents approximately a 50% retracement of the gains posted in gold from late 2008 to August 2011. The reality is that markets often retrace 50% or more of a move. It is quite common and can often be a great place to buy. We are not saying that will be the case here, but merely that it is a possibility and that should current levels hold, gold could go on a tear back to the upside.
One must also remember that this market has gotten very bearish very fast, and that the market is in an extremely oversold condition. Should bullion begin to build a base at current levels, and should physical demand remain robust, it is likely that more shorts would begin to cover and that a sizable rally could then take place. The next few sessions in gold should give investors clues as to whether the bloodshed is really over or not.
Chart Source: QST
