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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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Paraguay also raised its reserves in July from a few thousand ounces to more than 8 tons. So far this year, central banks have added a net 262.1 tons to their reserves, compared with 203.4 tons in the first eight months of 2011. Turkey has added the most to its holdings, having raised its reserves by 100.2 tons in the first eight months of the year, followed by Russia, which has added 53.75 tons.

Summing up, the overall fundamental situation for gold is still very favorable. But are the recent developments in the yellow metal a mere consolidation or a beginning of a correction? We have prepared two charts for you today that will allow to put the recent price moves into a bigger perspective (charts courtesy of http://stockcharts.com).

The first one features the yellow metal from the perspective of other currencies. It is a non-USD gold chart, meaning a weighted average of gold priced in different currencies, other than the USD – the weights are as in the USD Index, so this charts is similar to the one featuring gold priced in euro.



On the above chart, we have seen some insignificant correction this week. It seems that a bigger correction could be seen simply because the recent move didn't correct anything (especially given Thursday's rally) meaning that the decline was not enough to change the attitude of market participants. Those who were betting on higher gold prices have not yet become discouraged by gold's performance and those who believe in the gold story and are waiting for the prices to get lower to add to their holdings, haven't done so.

We further see that the breakout above the declining resistance line has been confirmed by several weekly closes above it, but the price could still decline to this line in order to completely verify the breakout.
No positions in stocks mentioned.
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