What have we here?

The price of gold bounced up $16 yesterday, to close at $935. Have we seen the bottom of this correction? Is this the moment to buy? Is this the last opportunity we will have to buy gold under $1,000 in our lifetimes?

We don’t know the answer.

But when we think back on this bull market we remember all those times we tried to ‘buy the dips’ – for no good reason. When gold was $500...we waited to buy until it dipped down to $450. And when it was $700...we wanted it to go back to $600 before we bought more. Often, it didn’t dip at all...or didn’t dip enough.

We would have been better off taking a massive position at the beginning – when gold was under $300 – instead of chasing it all the way up to $1,000.

And now, here we are again...trying to get a good price. Is this the bottom? Or is this just a narrow ledge, from which gold will drop down another $100...or more? Will we feel like geniuses if we buy now...or idiots?

Alas, it is not given to man to know his fate.

But we have to make a decision. Buy? Sell? Do nothing?

Usually, doing nothing is the right choice. But, over the last eight years, doing nothing in the gold market has been the wrong choice. So, let us pull back the camera and try to look at the big picture again. Maybe we will see which direction gold is going.

“The trouble is gold stocks can fall a lot during even a typical correction,” opines colleague, Ed Bugos.

“Most everyone already knows that markets do not go straight up. If every dip led to higher and higher highs nobody would ever lose sleep over it. Trouble is, the company could always screw up, or one of those dips could turn into a bear market. I have seen the conviction behind many buy/hold strategies melt at the tail end of a normal correction, just because it is invariably worse than expected.

“However, there are ways to improve your long-term returns and reduce the impact of market volatility on your portfolio without ever having to trade in and out of your shares, and risk getting bucked off the bull too early. Options! Options allow investors to take advantage of leverage and limit their risk.

“They represent a way to benefit from most of the change in the value of the underlying property, or shares, without ever having to buy it. Due to this leverage they can sometimes increase hundreds and thousands of percent in the space of a week, or even a day, as in the case of Bear Stearns put options when the stock halved that fateful Friday before last. Consequently, they don’t only draw speculators; they draw gamblers ready to stake the farm on getting rich quick, by abusing the available leverage.”

But we digress. The news yesterday was as mixed as ever. There is record short interest on Wall Street. Speculators have sold short so many shares – anticipating falling prices – that they have practically guaranteed a rally.

Yesterday, the Dow rose only slightly. But as soon as prices rise – even a little bit – the short sellers take losses. They have no way of knowing how much the market will rise and how much they will eventually lose, so they have to cover their positions by buying back the shares they have shorted. This buying pressure drives up prices even more...forcing more short-sellers to cover...and turning a mild rally into an explosive move to the upside.

There is also a very high level of bearish sentiment among stock market professionals too – usually, a contrarian indicator of rising prices.

But the underlying news is still discouraging.

Jobless benefit payouts have just reached a three-year high, after a loss of 63,000 jobs in February – the most in five years.

House prices fell heavily in January...down about 11% from a year before. They’ve gone down every month – according to the Case/Shiller numbers – for the last 13 months. Foreclosures are still going up. And subprime defaults are still increasing.

With his house going down in price, and his job in jeopardy, the poor householder is feeling under pressure. “Consumer confidence crumbling,” says the Chicago Tribune . Polls show the consumer less optimistic than at any time since the Nixon administration. No wonder, really. Regular gas costs an average of $3.28. Food prices are soaring all over the world. In several foreign countries people have been killed in food riots; in America, family budgets are getting stomped.

Naturally and predictably, Americans can no longer spend money so freely. Retail sales fell 0.6% in February and are projected to grow at their weakest pace in 17 years – if they grow at all. And what’s a consumer economy to do if consumers stop consuming? How will it expand when the consumers’ pockets are empty?

Meanwhile, over on Wall Street, things aren’t looking much better. The wizards, it turned out, did the same dumb things that ordinary householders did – just with more leverage and champagne. Now, their high yield bonds are in trouble. Their private equity deals are in trouble. Their municipal clients are in trouble. Their MBS, SIVs and CDS are all in trouble. And because no one quite knows who is most in trouble lenders are reluctant to hire out their money. They keep it in their vaults – fearful that a borrower may not be able to pay it back...and that they may need it themselves.

Goldman is in the news today – with an estimate of total Wall Street losses from bad subprime lending of $460 billion. That’s about three times what has been disclosed so far. Which means, there are more disclosures coming...and no one is sure where the losses will turn up...nor what effect it will have on capital values when it does. So, while the money flows out of the central banks like Kool-Aid...when it reaches the banks it is more like molasses, sticking to the bankers’ fingers and clogging up the whole financial system.

Big mergers and acquisitions can’t be done. Today’s news tells us that the Clear Channel deal has been gummed up – banks are reluctant to finance it. Little deals, too, are getting stuck. “Small firms find credit is tightening,” reports the New York Times.

On Wall Street, as on Main Street, the situation is the same – “the game is over,” as the Economist put it.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.