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After going up and up for weeks, we finally saw the price of gold have a sharp drop yesterday for over $200 an ounce. Gold stocks got hit hard, with a 9.42% decline in the GDX ETF.

Corrections happen in bull markets and nothing can go up every single week.

Gold is still fairly far away from its 50-day moving average, and its 200 average is down to the $3200 area! I doubt it will drop that much, but we will have to see where it stabilizes, with the $4000 level one to watch. Gold is likely to go sideways for months once this puts in a price low in order to consolidate all of these gains, as its basically doubled in the past two years.

Silver’s 50-day moving average is now at $44.

And the GDX is not that far now from its 50-day moving average.

While mining stocks went up with gold, they actually began to lag the gold price action going into last week’s peak. That was a warning that a correction could start, because often when the gold stocks start to lag the metal on the rally that is around the corner.

You can see this with the GDX/GLD relative strength ratio and how it went sideways this month and then declined.

Now when gold corrects typically the mining stocks fall harder than gold at first and then start to firm up as the metals drop a little more. That is typically when the correction ends and a new bottom is formed.

So, if I was looking to buy I would be watching the GDX/GLD ratio closely here, and for it to start to turn up.

-Mike

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