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Is a Correction in Gold Under Way?

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The situation remains bullish for the medium term for gold, but a correction could very well be seen before the rally continues.

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Gold prices fell more than 1% Wednesday pressured by a stronger dollar and weaker stock markets along with profit-taking. Gold struggled to maintain gains after hitting six-and-a-half month highs this month after the Federal Reserve, the European Central Bank and the Bank of Japan announced steps to loosen monetary policy.

Meanwhile, scenes of large-scale protests against anti-austerity measures in Spain and Greece rekindled fears about the eurozone's three-year-old debt crisis. Gold and the euro have been moving in tandem for quite a while now (they both are negatively correlated with the dollar). Gold is still over 5% higher for September. The Fed's pledge to buy $40 billion in mortgage-backed securities each month as long as job creation remains sluggish should protect gold from crashing.

But will a serious flare-up of the eurozone crisis damage gold's upward trajectory? The New York Times reported that in Spain, where there is more than 50% unemployment among youths, people are rummaging through garbage cans for food. Spain has been forced to embark on the same path as Greece, introducing one austerity measure after another, cutting jobs, salaries, pensions, and benefits.

The gold market was kept afloat early this week by news that South Korea and Paraguay both significantly added gold to their reserves in July, highlighting strong interest in gold in the official sector. Data from the International Monetary Fund showed South Korea raised its holdings of gold by nearly 16 tons in July. The country has doubled its bullion reserves in just one year after being one of the largest purchasers of gold in 2011. The Bank of Korea has indicated that it will continue to bolster its gold holdings going forward.

It is interesting to note the sharp contrast with its impoverished sister to the north, which has very few ways to earn foreign currency. North Korea has sold more than two tons of gold over the past year as its economy continues to deteriorate. Cash-strapped North Korea raised roughly $100 million. Its leader, Kim Jong Un, went on a spending spree after his father's death, erecting a $40 million statue of his father, among other extravagances.
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