In Gold We Trust?

As John Meynard Keynes once said, “When the facts change, I change my mind…” The gold market has amazingly sold off in what has been a global sell off that has hit metals fairly hard…both industrial and precious. The main driver seems to be a great amount of fear regarding the present state of the global economy…. And the main source of this was some of the most brilliant economic minds present at the IMF's annual meeting this past weekend. IMF Managing Director Christine Lagarde painted a very gloomy and realistic outlook on the current global economy - with the Eurozone being a central focus. This saw a sell off in gold from highs as recently as $1904/oz on 8-22-11 to currently trading (at the time of posting) at $1644/oz. This is a sharp reminder that markets can behave in a very volatile and extreme nature. A major reason attributed to this sell off is the CME's raising of margin requirements to hold gold futures positions… thus causing forced liquidations. Other thoughts are that major players such as hedge funds (possibly John Paulson's gold fund) were taking profits at these new highs. All are viable reasons that should be accounted for. So how do you trade this market? Although this is a major swing and I sure do hope investors long gold were able to scale out profits or be stopped out with profits (remember to always manage risk effectively), I am still bullish gold. Weak economic data on unemployment and consumer confidence in the USA, coupled with a credit crisis in the Eurozone that can equal Lehman, and finally rumors that China's economy is beginning to weaken (real estate) has me thinking the fundamental reasons to be in this flight to safety trade still exist. I would recommend waiting for major support levels to form, which may be occurring now, and entering a long position after price pushes the 50 day exponential moving average towards the upside. Not getting caught picking a bottom and being patient here is key for success, but I do still believe in this market and being long gold.