Why Gold prices fell sharply along with Silver in September 2011??

Prices are now consolidating at higher levels, but the outlook is mixed, we still favour Gold and Silver!

• The rally in the dollar is a sure sign of a pick-up in safe-haven buying – we think Gold will benefit from this now the initial sell-off has run its course.

• The EU debt crisis looks set to come to a head soon – when it does the fall-out is likely to be bullish for Gold.

• The net long position in Gold has fallen significantly – the market no longer looks overcrowded.

• If Gold heads higher again, then Silver may have a lot of catching up to do – the Gold/Silver ratio is last at 1:51.

GOLD PRICES CONSOLIDATE AFTER A 20% CORRECTION – NEAR TERM UPSIDE FAVOURED.

Gold prices peaked at $1,921/oz on 6th September, they have since undergone a significant correction that took prices down to a low of $1,532/oz – a drop of 20%. Prices are now consolidating around the $1,650/oz level. The bears who had viewed Gold as a bubble market now probably feel vindicated. However, while we can see why some longs needed to take profits, we also feel that the arguments for holding Gold remain strong. Therefore we expect further price gains in the months ahead – although the next run higher might also signal the beginning of the end of this phase of the bull market.

THIS TRADING PATTERN HAS BEEN SEEN BEFORE.
We would say Gold is just repeating the pattern we have seen many times over the past decade, whereby a broad base sell-off initially carries Gold prices down as liquidation selling overwhelms the safe-haven buying. The secondary reaction is then to see safe-haven buying dominate again. Indeed, given we have noticed this pattern, others will have too, so safe-haven buyers probably now know it is best to wait a while – let prices really sell-off before buying again. The spike lower in prices on 26th September was caused by another hike in margin rates, which no doubt forced even more long liquidation – but that may well have now got the last of the weak longs out. However, after the volatility and with a far from perfect chart picture, buyers seem to be in no rush to return. There has been some buying, which has lifted prices $120/oz off the sell-off low, but follow through buying has yet to emerge.