The summer doldrums are normally a weak time for gold, with July and August historically being two of the worst months for the yellow metal. July followed this pattern with there being a great deal of weakness in the gold price. However gold prices have bounced back this month, with gold now only $60.00/oz off its high. We are not sure why so many investors believe all in the markets and general economy is well, when gold is a 5% from its all time high whilst the S&P 500 is 40% from its high.
We are of the opinion that all is not well, and hence we are very bullish on gold. Technically speaking we think gold has massive support from $1160-$1140, where various support levels are converging. The most important of those is the 200 day moving average, which has been a solid support for gold during its bull market run starting in 2001.
We expect gold to embark on a major rally, beginning within a month. However despite clocking consecutive daily gains recently we would like to see gold close above its 50 day moving average, before we could feel confident that this next major rally is imminent. But we are convinced it is a question of when, not if.
One must always look at the US dollar when trading gold, due to the close relationship between the two. We are expecting a slight rebound in the greenback or at the very least a pause in its decline. The technical indicators such as MACD, STO, RSI are all oversold, and the USD is sitting on a multiyear support at 80 as well as its 200 day moving average. That said, once these support levels are broken, expect the dollar to plunge south.
We currently have a significant portion of our trading capital in speculative option positions on gold, however we also have a substantial amount of cash on the sidelines, which is earmarked for taking more long gold positions. Barring any serious technical or fundamental changes, we intend to be 90% invested in gold within a month, however we are currently looking for the optimum time to inject our remaining cash.
There are two short term factors that could cause gold prices to drop in the next month, and therefore provide a possible entry point.
First is a strengthening of the US dollar, which could cause some weakness in gold prices. However, over the duration of this bull market the inverse relationship between the two has held up fairly well, recently this relationship has not been so stable. We have seen gold rising with the USD strengthening, for example during the height of the Greek sovereign debt crisis, so it is of course possible that with the US rebounding gold prices could continue to rise.
Secondly the infamous sell off in gold around options expiration, which appears to be occurring remarkably often, could temporarily knock ten or twenty dollars off the gold price and allow us to purchase our positions at a slight discount.
Given these two factors, and the fact that gold has still not posted a close above its 50 day moving average, plus August still being a seasonally weak time for gold historically, we are prepared to bide our time with regardless to acquiring further gold positions.
Looking further out we see more quantitative easing, dubbed QE2, on the horizon. This is likely to occur in a similar fashion to QE1, with the Federal Reserve purchasing massive quantities of US treasuries to keep rates low and inject mountains of cash into the system in an attempt to prevent a double dip deflationary depression.
Of course these policies will increase inflationary expectations as we expect QE2 to involve the Fed injecting perhaps another trillion dollars into the system, and money will flow to gold as an inflationary hedge. Gold will also attract more buying over the coming months as the economy begins to slide and more people realise this "recovery" was nothing more than shot of adrenaline which only gives a temporary boost. The safe haven status of gold will come into play as investors realise that they should probably "have a bit in gold" and their combined buying power could send gold past $1300 by the end of the year.
Whilst we are not certain that gold can reach $1300 in 2010, we are confident that the yellow metal will reach a new all time high by the end of the year, ie gold will trade higher that $1265/ounce.
In conclusion we would suggest buying gold on any weakness this month, but regardless ensuring that one has a decent long position on gold in place within the next 30 days. This next leg of the gold bull market will deliver spectacular returns to those on the right side of the move, so make sure you are in place and long gold to take advantage of this major rally. Our premium service OptionTrader delivers real time signals and update to subscribers, so if you are interested in using options to enhance your returns during this gold run visit www.skoptionstrading.com
Stay on your toes and have a good one.
Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.
The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:
On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.
On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.
Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.
To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)
For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.