Bäume Wachsen Nicht in Den Himmel

As Paul Volcker, the federal reserve chairman for eight years, beginning in 1979 used to say, “Bäume wachsen nicht in den Himmel.” This German proverb translates to, “Trees don’t grow to the sky, they never have, and never will.” It suggests that there are natural limits to growth. And in the case of financial professionals is a common phrase used to express that all markets have natural limits.

In the case of lower gold pricing today, it refers to the possibility that the recent top at $1350 is in fact the level of critical resistance that gold is unable to breach, at least on this run.

That beckons the question will gold prices experience a rational and reasonable correction. The validity of this question exists because recent price action has seen gold advance in price and only experience extremely shallow and limited corrections, well outside of the normal percentage that is given back following a bull run.

Investors typically look to see whether a correction is a shallow or deep correction. We define those points as percentages given back from the most recent price gains. A 23%, and a 38% correction are considered to be shallow retracements. Whereas a deep retracement will give back anywhere between 50% and 61.8% before finding support. While a 78% retracement is still within the confines of a correction rather than a key reversal, it is a rare occurrence. A major line in the sand that is rarely reached.

Currently gold prices are roughly $30 below the recent high of $1350 per ounce. This most recent rally began at just about $1200, resulting in a very respectable price gain of $150. If gold moves lower and confirms that a correction is currently in play the first level to look at would be the .23% Fibonacci retracement which sits at $1314.  For the next level below that we would look at a .38% retracement of the most recent rally. Which if gold were to fall to would take pricing to $1291 per ounce.

A deep correction could result in gold giving back anywhere between .50% and .618%. If this current correction is substantial gold prices could move as low as $1273, which is the .50% retracement, to as low as $1255, the net result of a .618% retracement.

Regardless of how deep or shallow this current correction is, it is occurring after a sizable and respectable upside gain. It is also quite feasible that following this correction the next rally could challenge the major resistance which has existed for the last couple of years at $1370 per ounce. So although trees will never grow to the sky, in the case of gold I believe there still to be room to stretch its limbs even if it must shed its leaves for the winter.\

Wishing you as always, good trading,