zak mir on gold and the search for the floor…

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3 mins. to read

While from a fundamental perspective, it is not entirely clear whether we have seen the worst in the Russia/Crimea situation, the recent Sudetenland tribute seems to have been fully discounted by Gold. Of course, the metal’s credentials as the best geopolitical barometer we have are very often eclipsed by Crude Oil. However, in the run up to this year’s attempt at starting a fresh World War, we did see Gold rally some $100 as tensions grew in the Ukraine, and then, frustratingly for the bulls (but perhaps not the Crimeans!) fade away almost as fast.

The key question now is that with the yellow metal essentially back to where it started at the end of January, will gold bulls be saved by the big inflationary bubble / fiat currencies meltdown theory, or killed by the China default / hard landing / deflation story? It would be pleasant to think that the former would win the day, given that it is about 3 years overdue, but unfortunately, cynics such as myself continue to wonder how China has managed to hold itself together with “7%” GDP growth for so long and so could very likely keep the glue in place for another couple of years!

As we grapple with such real world issues, it can be seen on the daily chart of Gold that the recent retreat has been so sharp that even the fabled 200 day moving average now at $1,295 has given way. From a trading strategy perspective, there are perhaps a couple of ways of grappling with the present situation. The first would be to wait for any dip back towards the floor of a November rising trend channel at $1,270, while the alternative is probably to wait on an end of day close back above the 50 day moving average at $1,307. While waiting on the 50 day line to be cleared may seem to be allowing a large chunk of upside to disappear, the problem with buying a stock or market at and around the 200 day line is that there can be several whipsaws before the sustained move finally arrives. Going for a 50 day line clearance should mean that you are “above the clouds” as far as near term volatility is concerned.

You will have noticed that as far as the next move in Gold is concerned that I have rather left the door open in terms of the call. This is deliberate given the proximity of spot price to the 200 day moving average. But, there is also the factor to consider here that very often Gold stocks act as a leading indicator to the underlying. We saw this ahead of the tumble for the metal in autumn 2011. While this is admittedly a rough rule of thumb, as far as a couple of examples I have picked out currently, there may be value in terms of going down this road and they seem to point to higher prices for the base metal.

For instance, it can be seen on the daily chart of African Barrick Gold (ABG) that it was July’s higher lows at and above 100p which led to the great turnaround. This was more than four months ahead of the last major low being made for Gold itself and flagged by positive divergence in the RSI window and an uptrend line.

As far as Russia focused Gold miner Petropavlovsk (POG) is concerned, on its daily chart there was a major low for the stock in July just after the late June floor in the underlying metal. But, the “final” low came in at the beginning of December, and this was a much as three weeks ahead of the metal. Indeed, after the dip in Petropavlovsk in the wake of the 2014 Putin Games, we have the possibility of a lasting rebound off the floor of a rising trend channel from September at 72p. While aggressive traders might already have gone long, for the rest of us, waiting for a RSI 50 break and / or end of day close above the 10 day moving average at 78p could be the way forward. The target would then be a partial or full retest of the February 95p plus resistance for the end of April / beginning of May.

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