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What's Next for Gold's Brutal Sell-Off?

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The top is getting further away, but how far will it go?

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Gold fell almost 5% last Friday to below $1,160 an ounce on the latest "positive" jobs data. Tuesday, gold futures fell for a third straight session as worries about credit problems in Greece and Dubai helped the US dollar extend gains. This clearly is the beginning of the gold correction that I've been predicting for weeks.

Is there any reason to be worried about the long-term bullish trend for gold?

If you're not a regular reader of the China Youth Daily (in Chinese), it's possible that you may have missed one of the November reports.

The paper reported a high-ranking government official saying that China should increase the amount of gold it holds in reserves to reduce potential losses from a depreciating dollar.

"We recommend China increase its gold reserves to 6,000 metric tons within three to five years and possibly to 10,000 tons in eight to 10 years," said the paper, citing Ji Xiaonan, chairman of the supervisory committee overseeing large state-owned enterprises under the State Council.

Previously I mentioned that China is undergoing major changes in the way it handles gold. Private gold ownership had been outlawed in China for generations until 2002, which is when the Shanghai Gold Exchange opened and began free trade in gold for the first time in the nation's history.

Even more recently, China legalized gold investment by private citizens and even advertises its benefits in television infomercials.

The Chinese government is telling its citizens that gold and silver are good investments that will safeguard their wealth. People in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver.

Considering the high savings rate in China (mostly in the 30% to 40% area in the previous years), gold is a logical investment for the Chinese and it's possible that billions of dollars in Chinese private investment could move into gold in coming years.

Already there's talk of China overtaking India as the world's largest consumer of gold.

Consequently, the fundamental situation remains positive, which means that the bull market is still far from the ultimate top, but it doesn't have the decisive impact on the short-term price swings.

In this case, to avoid brutal sell-offs (like the one that we're currently experiencing) one needs to carefully analyze the current situation by applying the technical analysis.
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No positions in stocks mentioned.
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