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Is A Gold Correction Coming?

On August 15 of this year I sent out a special bulletin to my subscribers recommending the purchase of gold stocks. I believed at the time that gold had bottomed and would rally into the end of the year.

When I bought I had a plan to sell - I either would sell if gold and the stocks made a climactic exhaustion top or if the stocks began to lag the price of gold. The latter began to happen this past week. Although gold and the XAU both went higher on Friday, the fact that the stocks are now lagging gold tells me that a top is likely being formed.

The chart below shows you the price of the XAU divided by the price of gold. When it is rising the stocks are outperforming the gold price and when it is falling the gold price is leading the stocks. As you can see the stocks began to lead gold in August and started to lag gold last week.

The Relative Strength Relationship Between the XAU and Gold Has Been Consistent

The relative strength of the XAU and gold is in the bottom section of this chart. Notice that important bull runs in gold began when the stocks asserted leadership against the metal.

This happened in April of 2003 and in August of 2004. It is one of the reasons I got bullish again in gold this past August.

You also should notice that the bull runs came to an end when this leadership position switched. This happened in December of 2003 right before gold stocks corrected and is starting to happen again.

I think we are likely to see some sort of correction in gold stocks before we see them make new highs and begin another big run. A drop of 10-15% from here in the XAU would not surprise me.

There is a precedent for this. In November and December of 2002 we saw the gold market put on the same type of rally it has now: Gold made a new 52-week high and broke out while the gold indexes rallied but failed to break their 52-week highs.

This happened back then and is happening now. If the pattern continues, then gold and mining stocks will correct into January and next year the XAU and HUI will recover and go to new highs before gold does. Such a scenario would lead to a monster gold rally, larger than we have seen so far in this gold bull market.

We're still in a secular bull market in gold. Phase II is only beginning. But all bull markets have temporarily dips and pullbacks. Remember the wall of worry. A correction will build it back up again and cause many gold bugs to lose their resolve, but prudent investors must take advantage of any dips.

A correction in the near future will take a lot of people by surprise, but it will likely prove to be the final dip before the next big leg up in the XAU.

To find out what gold stocks Mike Swanson holds and plans on buying subscribe to his free Weekly Gold Report at http://wallstreetwindow.com/weeklygold.htm.

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