MIDAS support for gold at $1,206/oz

So, this been quite a week for the precious metal.

To say the trade has been choppy would be quite an understatement. Four of the five trading days have seen 30-40 intraday moves. We’ve tested some of the lows set earlier in the summer and there is a feeling something significant is going on in this market at present. Earlier today, our proprietor, Richard Jennings, wrote another bullish call on gold, pointing to further evidence that a bottoming process is playing out. A cursory glance over the chart below, strongly suggests he could be right:

But of course, whether or not this truly is the starting point of a golden fight back remains to be seen, but for my ten pence worth in the debate, I’m backing my call that gold is transforming from a crisis trade into a fundamental trade.

I’ve already written a lot about the miners in recent blog posts. However, I have been meaning to return to the MIDAS Method’s take on the state of this market. Below is the MIDAS chart for gold, since the start of 2000:

I’ve left three lines of support on this chart, as each has something to tell about where we are now and what might come next.

Starting first with JUL2013 support (the light blue line) at $1,313.52/oz, strictly speaking this support line has failed and is no longer valid. I left it in to illustrate the breakdown in the summer’s rally. Initially JULY2013 support held and this was very encouraging. The first pullback in the market in August was followed by a quick rally. When the price pulled back again, there was another opportunity to go long and make a quick profit as the Fed blinked in response to the taper tantrum. Since then, the price trod water and then sank.

Now we are back towards the bottom of the mid-summer lows.

The next level of MIDAS support is probably much more important. The purple line is JUL2005 support at $1,206.33/oz, which is obviously a hair’s breadth below where the market has traded this week. When it formed, this marked the beginning of gold’s major move to the upside and this level of support has been tested and held at crucial points in the development of the price. In 2008 at the nadir of the GFC, gold tested JUL2005 support and then went on its incredible run over the next 2-3 years. This summer, JUL2005 supported was tested once again, as many in the market threw in the towel and ditched their holdings. Once again the level held at a time of crisis.

And now we are there again.

If the price does fail from here, the next stop is $1,087.97/oz, which is APR 2001 support (the pink line). To be perfectly frank, if this happens then our big call of late 2013 at Spreadbet Magazine will go up in smoke. There would be chaos within the industry and it would probably take a long time for the industry to recover. However, we are a long way from that point yet.

The price action this week in the yellow metal strongly suggests that it is finding its footing. Although the price hasn’t yet touched JUL2005 support, it is hovering just above it. More aggressive traders will be taking the opportunity to go long. For what it is worth, I have opened a reasonable position, but I am keeping some powder dry. Ideally I would like to see JUL2005 support tested; then I plan to go in heavier, with greater leverage. This will certainly be a risky play, but these opportunities come around once in a blue moon.