GOLD: The bewitching hour of a triple bottom is upon us

Background

The last time gold sparkled was in the summer of 2011 when an all-time record of $1900/oz was achieved. Alas since then it has been a torturous journey as gold prices has trekked south arriving at today’s price of $1216/oz, registering a loss of 36%. However, for the year to date gold is still trading above its low of $1180/oz as it grimly hangs on to a modest gain of 3%. The question we face now surrounds gold’s direction; will it test the previous low of $1180/oz and bounce to higher levels or will it penetrate this support level and set the stage for sub $1000/oz gold prices.

Gold’s precarious position

In the past we have expressed our skepticism regarding gold’s capitulation which we saw as a ‘capitulation of sorts’ and not a final capitulation. The bulls fought back through a number of promising rallies, all to no avail as these petered out and prolonged gold’s ability to find its real bottom. A lot of the weak hands have gone and some of the stronger ones who still hold long positions must be having second thoughts as to the wisdom of such a strategy.

The above chart shows that gold formed a wedge from which it unfortunately broke out to the downside which is negative for future prices. Also note that gold is now preparing to test the $1180/oz level for the third time. If this support level can hold then it will be a good platform on which to build the next bull phase of this bull market. Should it collapse then the patience of those who are not already out will be severely tested with the next stop on the way down being the $1000/oz level.

Also worth watching is the price of silver which could support gold prices, however, support from gold’s little sister has not been forthcoming. Silver prices have now penetrated the support it had established at $18.00/oz and could head lower testing the $15.00/oz level.

The miners are offering little in the way of support and they won’t be spared if this rout takes place. The Gold Bugs Index (HUI) stands at 202 today just 12 points above its low for the year of 190. Many of the precious metals mining stocks are now trading at prices which are way lower than those achieved over the summer which in turn follows a couple of bad years whereby the HUI has lost around 66% of its value. Should the 190 level fail then a retest of 150 is on the cards. The last time the HUI traded at 150 was in 2008 when Endeavour Silver Corp (EXK) traded below $1.00, Agnico-Eagle Mines Limited (AEM) at $20.00, etc. This may sound ridiculous to you at the moment but for us it is a distinct possibility as the bears are in control. This decline may not be of the ‘spike’ variety and it could include the occasional bounce particularly as current prices are severely oversold.

On the bullish side we could argue that supply is dwindling, demand especially from China is growing, there is a rise in turmoil across the planet, a new gold exchange in Shanghai, the London mint is to produce gold coins, money printing, etc. We are all aware of the above along with the many metrics and data points that normally support higher prices and suggest that gold prices should be much, much, higher than they are today.

Conclusion

We are finding it difficult to come up with a catalyst that would ignite gold and silver prices and despite the positive factors bearing on gold they are having no effect whatsoever.

The next bounce in prices, if and when it comes could be another false dawn disguised as a rally and we have had many of those over the last three years. Our preference is to watch the market and use any bounce in prices to establish short positions. It may be possible to trade the bounce with long positions but as investors we would need to be very nimble and move in and out with some speed and gusto, which is not everyone’s cup of tea.

We have kept most of our funds in cash and are pleased to have done so as we can now buy at cheaper entry prices or open short positions without feeling too pressured if a trade goes against us in the early days of its existence. By adopting a flexible approach whereby we can be bearish or bullish in any market sector, our options trading team has generated a profit of 932.79% in just 5 years. 

Do try not to be a perma-anything, as such rigidity takes from you the opportunities that are presented by the markets in both directions.

Got a comment, then please fire it in whether you agree with us or not, as the more diverse comments we get the more balance we will have in this debate and hopefully our trading decisions will be better informed and more profitable.

Go gently.