Why You Should Look for Gold to Correct Again

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I am extremely bullish on gold. I think the price could climb dramatically from the current $1,320 per ounce price. However, having a position already, I can be selective in when I choose to add to my position. While last week’s surge generated a lot of investor enthusiasm for the yellow metal, I am not so sure that we are out of the woods. I am not selling what I own, but I am also not adding at this point.

While Tuesday was a relatively quiet day for gold, when we look simply at spot price fluctuations, we saw some wild swings in the mining shares that leave me nervous. The Market Vectors Gold Miner ETF (NYSEARCA:GDX), which holds a basket of the world’s largest gold mining companies, had what traders call an “outside day.” This means that the fund opened Wednesday’s trading session higher than Tuesday’s closing price, and it closed lower than Tuesday’s opening price. The idea here is that while the market looked relatively positive on Tuesday, it brought in selling on Wednesday that was too large to be overcome by the bulls.

The GDX traded as high as $26.53 and it closed at $25.47, or about 1 percent above the low. This wild swing suggests to me that we could be setting up for a correction in this fund. This is to be expected, considering the incredible price increase we have seen thus far in June, with the fund trading up from about $22 per share to over $26 per share for about a 20 percent return in just a few weeks. Anytime we see this sort of gain in any market, we should expect some sort of correction. Right now, there is strong support at around the $24 per share level, and I expect the shares to trade down here in the next few days.