GOLD – A TEST OF FAITH

By Ben Turney.

We’ve been quite categorical about our position on gold over the summer. We are bullish and believe the current pullback represents a buying opportunity.

It is true that many die-hard gold bugs loudly proclaimed their allegiance to the precious metal from the top, all the way to the bottom, losing fortunes in the process. While we hope we haven’t been afflicted by the same investment fanaticism, we are betting that the latest weakness is a precursor to the next move higher. It is possible that the recent drops have been exacerbated by taper-related speculation, but we are now at or are approaching several key areas of technical interest. As always, we let ourselves be guided by what the charts have to tell us.

Below is a 5 month view of gold;

When we wrote about gold a month ago, our stance was bullish. It still is. However, as all sensible traders should attempt to do, we also identified three areas of resistance, where we felt the precious metal would be tested. Depending on how aggressively you decide to trade, obvious potential reversal points provide the opportunity to take profits and reduce risk, by moving up stops.

The price action in gold of the last few weeks has been a perfect case in point. Although our position was (and remains) bullish, it was important not to become dogmatic about this.

Over the remainder of August the 50MA began to rise encouragingly and the 100MA flattened. In the context of how this market had performed over the summer, this wasn’t too surprising, but was still a welcome sight for the bulls. Then things took a turn for the worse.

The first test of gold came at the 100MA. It took gold 4 trading days to break through this moving average, but when it did, it advanced smoothly, broke through $1,400/oz then reversed. As it happened, this reversal occurred almost exactly at the mid-point in between our next two zones of resistance ($1,400-1,405/oz and $1,460-$1,470/oz). On August 28^th gold posted an intraday high of $1,434/oz), but has since sold off fairly heavily.

Now we find ourselves at an important juncture, in what should still be a nascent bull market.

First the 50MA and 100MA are very close to crossing over. Although not as powerful a signal as a golden cross, if the 50MA manages to pass through its larger pier, this should give some confirmation of the new trend being in place. That daily RSI is approaching oversold territory, could also provide this confluence with an additional boost. Usually when daily RSI passes below 30 this represents a decent buying signal. If the market reacts, as it has often done in the past, it won’t take much to push the 50MA above the 100MA.

Next we look at the MIDAS chart;

JUL2013 support is currently $1,321/oz, roughly $20 above where the market currently trades. If we are in a new bull market then this support line should hold. MIDAS performs best, when a market has turned and a new trend is in place. In the case of JUL2013 support it has already passed several key tests, which increase the confidence MIDAS users can have in it. When it launched, this coincided with a double bottom in gold at about $1,200/oz. Then, at the start of August, JUL2013 support was briefly breached at about $1,300/oz, only for the price to rally strongly soon after.

If the market turns and prices start to move higher, then expect a fairly quick retest of $1,400/oz.

What is great about the current position in gold is that it affords traders a good opportunity to open a leveraged long position, with tightly managed risk. If prices fall from here it should be possible to get out, without much harm done.

All eyes are now on the FOMC’s announcement. It is possible there will be some increased volatility before and after they announce their plans, but barring a spectacular own goal, it is hard to see them doing much beyond what is already expected. Once this event is out of the way, it will then be up to gold to demonstrate its bullish credentials. 

Declaration: I am currently long gold, using spreadbets