The fundamental outlook for gold remains strong despite the recent pullback. Treasury yields continue to fall suggesting weakness in the economy, and short term T-bills remain well below the inflation rate (i.e., year over year change in CPI). These are gold positive. Despite the positive back drop, pull backs within the major trend do happen and it is not unusual for gold to undergo a correction. The question is always how much.

As I correctly (I think) identified on August 24, 2011, the persistent up thrust in gold was ending. Whether it meant the start of a more significant pullback or the start of something more serious was not clear. It just looked like the SPDR Gold Trust (symbol: GLD) needed a "breather". I had identified 173.49 as support, and except for 1 day that saw prices open well below this level only to trade back to this level the very same day, this support level has remained true. See figure 1 a daily chart of GLD. The day in question, which was meant to separate you from your money and the bullish trend in GLD, is noted with a blue up arrow.

Figure 1. GLD/ daily

Proprietary research, where I look at the draw downs from individual trades from the gold timing model, suggest that the average (max) drawdown is around 10% for each trade. The range is 2.69% to 29%. Currently, GLD is about 7% from its highs.

Returning to figure 1, we note that the GLD has found support at the key pivot level (pink dots) at 173.49. If this level fails to hold, prices on GLD could trade to 165 or possibly 156. Resistance is at 183.58.