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Eureka! Gold finally took a little break.
Periodic corrections within a secular bull market are a bit like pit stops within a race. They replenish the fuel supply to keep the engine running, add fresh tires to improve traction during the next phase of advance, and offer the driver a valuable chance to tweak a winning strategy. Without them, you'd have a track littered with obstacles to ensure a less orderly race.
Gold carved an overdue retreat this week after punching through to a new all-time nominal high above $1,900 per ounce, and rapidly approached the $1,700 mark Thursday morning before recapturing $1,750. Seasoned gold investors know to welcome the corrective retreat as the necessary fuel for a sustained and orderly long-term advance for the monetary safe haven.
Gold needed a pit stop
Commodities guru Jim Rogers offered the same valuable perspective when silver retreated sharply from its noteworthy surge toward $50 last April, providing a poignant reminder that a truly parabolic move in precious metals is not a positive development for anyone. Rogers advised: "I own silver, but if it keeps going up, it could turn into a problem if it goes parabolic. I certainly hope silver goes down for a while. I say it as somebody who owns it because if it goes down, I hope I would buy more and if it goes up too much too fast, then I have to sell."
The longer gold continued to surge higher without so much as a moment's pause, the more the risks accumulated for a more volatile and unstable road forward for both the gold market and the global currency markets at large. The onset of a correction serves to reduce speculative froth, shake out the weaker hands of short-term traders in favor of long-term-oriented investors, and replenish demand with the emergence of a relative bargain.
That this particular correction was exacerbated by CME Group's announcement yesterday of a second margin increase for gold futures (in as many weeks) only aids that important process of flushing out some of the more heavily levered speculators and short-term traders. Combined, the two actions during August raised the margin requirement for a gold contract by 55.6% from $6,075 to $9,450. I welcome these moves as positive developments for gold's bullish outlook for a more orderly long-term advance.
A far more favorable entry point
For those who remained in the stands over recent years as gold lapped most competing investment vehicles, a sharp correction like this one offers an undeniable opportunity to acquire some overdue exposure at a reduced risk relative to just a few days ago. When I encouraged newcomers to "add into weakness" within this discussion last week, this is precisely the sort of pullback I referred to. Although it's too early to tell whether the correction has yet run its full course, the abrupt $200 decline is nonetheless a noteworthy positive development for those looking to initiate or increase exposure to gold.
And if anyone out there is concerned that gold may have just reached its ultimate finish line near the $1,900 level, I would remind them that just over two weeks have passed since analysts at JPMorgan called for gold to reach $2,500 before the end of this year. Although I certainly have my doubts as to whether their prediction will hold true within that specific time frame -- and, indeed, I hope they are proved wrong about the timing for the reasons discussed above -- I am entirely confident that gold prices will continue to advance in that direction.
I retain that confidence because, in essence, nothing has changed. Although financial markets can be easily pacified in the near term by speculation of forthcoming restraint from the Federal Reserve with respect to additional stimulus or liquidity, I think we all know that any such restraint is ultimately contingent upon the direction of prevailing economic indicators. Lately, the data have spun a decidedly recessionary tale. Markets can also be pacified by a symbolic gesture like Warren Buffett's $5 billion vote of confidence for Bank of America (NYSE: BAC ) . And markets can also find solace in a moment of respite from the spiraling debt crisis in Europe, but I don't believe that any of these near-term sources of relative calm are indicative of any lasting repair to the underlying issues plaguing the global financial system. As I've been saying for years, I hope that I am wrong in my perspective, but thus far gold's relentless multiyear advance has suggested otherwise.
Positioning now for gold's continuing advance
Because I have responded to this sharp correction in gold with some personal additions to my core equity positions among the many undervalued miners of gold, it becomes challenging to discuss my top picks in the midst of such a compelling buying opportunity. Among those stocks that I have not purchased shares in recently, Northgate Minerals (AMEX: NXG ) stands out as the pick of the litter. I do believe, after all, that it is the greatest gold stock in the world. The company just released yet another set of hugely encouraging exploration results at Young-Davidson, featuring a wide 44.1-meter intersection with a gold grade of 5.3 grams per tonne!
Next on my own personal short list lies Claude Resources (AMEX: CGR ) , the small-cap producer that continues to encounter promising gold deposits both at its flagship Seabee mine and at the exciting Amisk project (both in Saskatchewan, Canada). After Agnico-Eagle Mines swooped in last month with a Buffett-like endorsement of Rubicon Minerals (AMEX: RBY ) via a 9.2% equity stake in the shares, I view Rubicon as another golden option for discerning investors. Meanwhile, Fools digging for the "poor man's gold" may wish to carefully consider Great Panther Silver (AMEX: GPL ) , Alexco Resource (AMEX: AXU ) , and Endeavour Silver (NYSE: EXK ) .