Stock Market Correction Phase Over? Spot Price of Gold Looks to Be Bottoming

The third quarter has finally closed…and thank goodness. If you weren’t short the stock market, you were feeling its pain. The broader market basically fell off a cliff in the last week of July and first week of August. The S&P 500 Index has been trading in a tight range ever since around the 1,175 level and the near-term trend seems to be more of the same. If there is to be any breakout to the upside, we’ll need some hardy news; likely regarding the sovereign debt issue in Europe or new policy action from the Federal Reserve. While the earnings picture looks good, it’s hard to imagine spectacular results from this economy.

Also notable late in the third quarter was the price correction in commodities. It only seems reasonable that reduced expectations for global economic growth should be felt commensurately in the prices for raw materials. The spot price of gold is mimicking the recent trading action of the stock market and it’s unclear when it might resume its upward trend.

However, I do think that the medium- to long-run upward price trend in gold is intact and this is due to a combination of fundamental factors that remain in force. And we can’t forget that, while the Main Street economy isn’t producing much growth, inflation is still out there stalking consumers’ ability to employ purchasing power.

I think the current environment is an opportune one to consider gold investments and other precious metals like silver. We’re now in the price correction that precious metals deserved. The top stocks for speculative investors remain gold miners and it’s the one industry that is generating double-digit growth in revenues and earnings.

Long-term, income-seeking investors can be buyers in this market; but, of course, expected returns have been reduced. I think a blue-chip investor would be lucky to receive a 10% return on investment in the age of austerity. It’s the new reality of the economy and it’s going to last for quite a long time.

If you want to see something interesting, pull up a five-year stock chart on SPDR Gold Shares (NYSEArca/GLD). This is the gold exchange-traded fund (ETF) that’s very popular with both individual and institutional investors. Looking at the chart, you’ll notice a very consistent and defined upward trend in the value of the ETF. You’ll also notice the recent spike to a record price high of $185.00 and the subsequent price correction to its current level of around $157.00 per share. In my mind, this price correction has now fully returned the SPDR Gold Shares ETF to its primary trend and is signaling a technical bottoming out for gold. Accordingly, now seems like an appropriate time to consider new positions in these kinds of assets.

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