Last week was an ugly one for gold as the yellow metal shed nearly $50/ounce and ended the week at its lowest weekly closing level since July:

Gold (Daily)

A ~$300 rally from the May low to the early September high has now given way to a slightly more than $100 correction. From a longer term vantage point this is normal and healthy price action, with a powerful bullish impulse move followed by a 30%-40% correction. 

As gold tests previous resistance amid deteriorating sentiment, now comes the challenging part for investors. Do you hold your nose and step in and buy at what should be support? OR do you wait for things to get much worse and risk missing the low before gold resumes its bullish longer term trend? 

While there is no perfect answer to these questions it makes sense that we need to see a little bit more fear before a sustainable low is put in place for this correction. After all, the Daily Sentiment Index (DSI) for gold is still only at 29 and speculative positioning and open interest in gold futures remain at elevated levels. 

Technically speaking gold is sufficiently oversold on the daily timeframe for a tradable low to be put in place any day now. However, some will say that sentiment needs to get a lot worse (DSI < 10) before a real bottom will be put in place. However, if gold really did begin a new cyclical bull market cycle in May of this year then we shouldn't be looking for sentiment to reach extreme overbearish levels over the coming weeks. In my estimation, a further decline down to the $1440 area along with a DSI reading below 20 should be sufficient to ignite a strong rally into year end. 

Back in September I wrote a couple of articles in which I said gold will remain in a strong bullish trend as long as price does not fall back below $1440 on a weekly closing basis. Now that we are closer to this level my assessment hasn't changed, despite the fact that recency bias makes most of us more fearful of further declines. 

All the reasons for owning gold that Ray Dalio so articulately laid out in mid-July are still present today, in fact one could easily argue they are stronger today than they were in July.  

"So, the big question worth pondering at this time is which investments will perform well in a reflationary environment accompanied by large liabilities coming due and with significant internal conflict between capitalists and socialists, as well as external conflicts. It is also a good time to ask what will be the next-best currency or storehold of wealth to have when most reserve currency central bankers want to devalue their currencies in a fiat currency system." ~ Ray Dalio

Do you have what it takes to buy at support when the crowd has turned bearish?

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