The precious metals have had a remarkable run since their breakouts last year, and are due for a pullback and consolidation which we have been in for some time as some of the seasonal factors waned.
Gold in particular is correcting as we can see from the next two charts. There is support at 1340 and 1320 which are both at natural fibonacci retracement levels, depending at what point in the rally one wishes to begin to measure.
In the correction of early 2010, gold fell roughly 6% from its peak reached on January 10, as is shown in the third chart.
From its recent peak of 1420, a decline of 6% would take gold roughly to 1334.
So it appears that this is a consolidation that one might expect. The impact must be greater in assets with higher leverage such as mining stocks, or even in the higher beta silver bullion.
IF there is a panic liquidation in stocks, then we might expect to see something more extraordinary.
If I have any disappointment it is that gold is moving with stocks, and has not yet diverged to move more closely with the currencies, and as a safe haven. That apparently is yet to come. But for now it is moving as if it is running with the monetary inflation being generated by the Fed. And so it will continue while the Fed is printing.
As an aside, there have been some recent comments about accounting changes at the Fed and some constraint regarding its 'insolvency.' This is an accounting technicality and a bit of a red herring.
The Fed as the agent of Treasury has always been incapable of becoming practically insolvent, because as Benny has allowed in a rare moment of candor, it owns 'a printing press.' Sovereigns who can print their own currency do not become insolvent, or bankrupt. States and the PIIGs can go bankrupt because their money is contingent. But with sovereigns, their currency becomes increasingly worthless as they pay their debts, denominated in their currency, with more of their currency. The difference is important because it tells you what to watch for, and how things will break down if they do. And by the way, this is why the sovereigns have an hysterical animosity towards gold and silver.
The only practical limit on the Fed's ability to monetize is the acceptability at value of US bills, notes and bonds, and the dollar is a Treasury bill of zero duration.
2011 is a year of revelations, and 2012 will be a year of wonders, at least in the worlds of politics and economics. Maintain your perspective, as panic, too often fed by over leverage, is the great enemy of your portfolio. If you trade, then trade. But if you do not know how to trade, how to protect yourself and hedge, then by all means stay out of the short term trades in the markets, for you will surely lose.
