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Is the Selling Over In Gold?

Commodities / Gold and Silver 2011 Jan 27, 2011 - 02:02 PM GMT

By: Jim_Farrish

Commodities

Are gold prices ready to resume the run higher? It has had an auspicious start to 2011 and the negative reports relative to the metal have been on the rise. The gold bugs are jumping up and down saying buy, buy, buy! And the other side is calling for the price to fall to $1050 per ounce. Who is right in the quest for profits in gold?


The reality is that they both maybe right. We have seen a short term pullback of nearly $100 per ounce for gold and it currently hit a key support level and held. Before we look at what opportunities are in gold, let’s look at what is happening to influence the price of gold. Risk in Europe, relative to sovereign debt, is alive and well, despite what you hear in the press. There is the free money program from the US Federal Reserve that was reinforced in yesterday’s FOMC meeting, US/China yuan arguments and trade are still on the front burner impacting trade relations, and the real threat of inflation in China and Australia. These, and more, are fuel for the argument that gold is heading higher. The average estimates are at the $1650 level by year end. Gold closed at $1343 as of this posting.

Support at $1320 held for now and that bodes well for a bounce in price short term. Part of the blame for the price decline has been hedge funds selling, but according to MF Global, the large sellers appear to be out of their positions and normal trading is resuming. That brings support into play and if buyers step in, a run higher could be the next move.

We reported in our updates if gold broke below $1317 to look for a short entry point as prices would likely accelerate lower. So far support has held and the push higher on Wednesday brought out some bullish comments relative to the upside.

There is underlying demand for gold beyond the speculation trade. Jewelers and central banks drive the price with physical demand. Russia has been reported to be adding to their reserves along with India and the Middle East. If the speculation wains short term (i.e. speculation or hedge fund selling) the physical demand could be the wild-card that keeps prices steadily rising.

Looking at the chart below (iShares Gold ETF, GLD) it offers a potential short term trade on a bounce off support at $129.50. The support is created in relation to the rounding top pattern. The bounce could draw enough interest short term to push the price back to $133.40 or the 20 day moving average just over $134. This could best be captured with an option trade.

On the downside I still expect the 200 day moving average to come into play eventually as support for the price of gold. At that point a longer term opportunity would be of interest. Thus, the short term trade opportunity is the bounce off support back towards the 20 day moving average and the longer term outlook is a test lower towards the 200 day and with a period of consolidation before making a run higher. The long term investment opportunity would be to add gold on this pullback. If the price pulls back again towards the 200 day moving average as support add to the position and look for gold to rise longer term (12-18 months) back towards the $1650 level as a target or $163 for GLD.

The Fed action or non-action following the FOMC meeting helped the price of gold rise off support. With the threat of an interest rate hike out of the question near term, and the continuation of the free money program, the short term threat is tabled for now. The bounce yesterday afternoon following the FOMC meeting benefited GDX, Market Vectors Gold Miners ETF which gained 3.8%. The bounce is in play the question is how much and how long.

Disclosure: Money Strategies nor it’s clients hold positions in these securities currently. If the conditions present themselves in the coming days we would execute positions in GLD.

Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com.  His primary goal is to educate people about investing.  He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence.  Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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