Why I See an Upcoming Trade Opportunity for Gold

By George Leong, B.Comm.

If you are a gold bug, you probably won’t like what I have to say in this column, but just give me a chance to explain why I simply feel the time for the shiny yellow metal has come and gone for now.

Yes, the yellow precious metal could inevitably head back to the $1,800-an-ounce level, but I doubt that. Maybe $1,400, but it won’t reach much higher in the short term, of course, unless the country defaults on its debt, a war in the Middle East escalates and brings in more countries, or inflation suddenly jumps much higher.

But to expect gold to rally back above $1,400–$1,500 just because we are seeing some central banks buying or people hungry for jewelry—it’s unlikely that will happen.

The best trade on the yellow ore is as a safe haven play. There are many who talk about the limited amount of yellow ore in the ground. That may be true but so far, we have ample supply. Plus, there are more reserves yet to be unearthed.

Back in September, when gold surged by $60.00 to over $1,360 an ounce following the decision of the Federal Reserve not to begin its tapering program, I was bearish on holding the precious metal. Even when gold fell back, then bounced back to $1,340, I was still not convinced.

Here we are with gold hovering around $1,280 an ounce. Last Friday afternoon, prices were at $1,287 an ounce—a decline of roughly $29.00 an ounce in intraday trading. There was news that prices fell $25.00 an ounce in two minutes on Friday morning due to a major order to sell 5,000 gold futures contracts at the market price. The question is whether it was a case of sticky fingers or some other manual mistake.

Whatever the case, I still would be hesitant to buy and hold, as there’s little reason to favor the yellow metal at this point. You may want to trade gold, but only do so with tight stops to the downside, as there is vulnerability to the $1,200 level.

Take a look at the chart for gold prices below. Note the bearish head-and-shoulders formation, as indicated by the three short horizontal lines. The long horizontal line represents the “neckline”—a line of support that when breached could trigger a downward slide towards $1,200.

Now, look at the chart of the Gold Bugs Index below. Note the price of spot gold (as shown by the dotted green line) and the index (as shown by the red candlesticks) have correlated in the past.

The interesting thing is that gold could be near a bottom now, as shown by the double bottom on the chart. If the index reverses to the upside, expect to see prices rally. A potential buy-in for a trade from the long side will occur in the low to mid-$1,200 range.

This article was originally published at Investment Contrarians