Is gold's correction over?

Could the gold (COMEX:GCG14) correction be over? After more than a decade of perpetual strength, gold suffered its worst losses since the early 1980s, sliding 28% in 2013. Many investors have become weary of the volatile decline and have eschewed the metal in favor of stronger markets; however, this has helped to return this long-term bull market to health, and may have set the stage for the next major rally.

There are a few hallmarks that a bull market that has grown long in the tooth, most notably excessive speculation, radical predictions and forecasts, and a surge in volatility. These factors were all in place in 2011 when gold peaked at just over $1,900 an ounce.

The decade-long march higher had helped fuel the rise of physically-backed precious metal ETFs, which at their peak held a combined 2,600 metric tons of gold. High profile money managers, such as John Paulson and Eric Sprott, had launched “gold funds,” which invested principally in the metal. There was a never-ending supply of market pundits ready to espouse $5,000 gold, and the ensuing commercial breaks were replete with messages from eager buyers for your “used and broken gold.”

When the bubble finally burst, traders were caught as deer in headlights, facing $100 intraday swings, and implied volatility for gold options more than doubled from a complacent 15% to more than 30% in a flash. And while it was a textbook case of a bull market in need of a correction, it has taken more than two years for the exuberance to wane.

Jump to today. Gold has fallen 38.55% from its high, landing it in the so-called “Box” for Fibonacci retracements – a commonly followed technical indicator (Chart 1). Mom and Pop investors, along with the stars of finance (Soros, Loeb, et al), have abandoned their gold ETF positions, helping to shed a third of all known gold ETF holdings (Chart 2). Even John Paulson, one of the world’s most renowned gold bulls and the manager of a huge gold fund, said he wouldn’t invest more money in gold personally, because it is unclear when inflation will accelerate.

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