Since early February I have visually described my position and mental framework in the precious metals market as being “Cool as a Cucumber”. This has served me well as it has allowed me to stay invested as the move powered higher and many bailed to the sidelines expecting an early correction. Well now that we are into the first significant pullback lets see how Mr. Cucumber is doing and some of the market factors he is considering. Is he keeping his cool?

Psychology

I am still of the view that the gold price doesn’t go much further down from here. Maybe down to 1180 gold or 180 HUI. But before that, I first think we are due for a bounce here. I just don’t see Mr. Market accommodating all of these sold out bulls by giving them their gentleman’s entry way down where they wished they had bought at yesterday’s prices. Sorry, they snoozed they lose. The rule of corrections is they come when nobody wants them. I would say the majority have been rooting for this one for 2-3 months. Also, corrections come when they are least expected and the majority have become convinced that price cannot recede and is actually at the cusp of an advance. Clearly this has not been the case. So with this reality, I would say that if we do violate these levels and enter into a deep correction it is the markets way of saying its not actually a correction, but in fact a resumption of the bear. So we watch and wait. Be patient and objective.

Step Sum and Open Interest

I refer to my colleague Mark Lundeen and his groundbreaking work on the step sum indicator, a running total of up vs down days. Gold has gone down the last 9 days in a row and 15 of the last 21 days. This is extraordinary compression and likely to relieve itself on the upside very soon. There is good and bad news in this observation. Note the chart below, we see the step sum hammering down, yet so far it has failed to drive gold to a new consolidation low. This indicates support, especially when you compare it to previous times. Note last fall where the step just cratered and hammered the gold price. The bad part is that the step sum has violated its previous low, so its a mixed view, but it’s pointing towards a relief rally in the down trend.