Maybe it’s because the holiday season is upon us, but I have been fascinated by shiny stuff for the last few days. Gold is hovering around levels not seen since before both began to spike in August of 2010. If you are a fan of bullion, I should point out that I am not talking about real shiny stuff, but about the iShares Gold Trust ETF (GLD). Physical ownership of precious metals is undoubtedly a good idea if your purpose is to insure against some financial Armageddon that you are convinced is coming, but for those of us who look more on the bright side and wish to trade them with a short term outlook the ease of access and liquidity that the ETF offers makes more sense.
I should also point out that I have a history here. It would be easy to point to this article, where I made a published and verifiable call at the start of this year that GLD was going to fall. At the time it was at around 160 and I predicted a drop to below 120 where GLD is now, so I must be a genius, right? Well, not entirely. One of the things that annoys me, and as I get older it seems that there are more and more things that do, is when pundits cherry pick their calls. Yes, I did say that, but in June I suggested buying GLD at around 131, so if you had followed my advice you would have bought back a little early and given back some profit.
The thing is, I’m not perfect and most likely nor are you, which is why, when trading, setting and sticking to stop loss levels is essential. In the June piece, for example, I suggested a stop loss at around 126 for that trade, so it wouldn’t have cost you too dearly. I have made some decent calls on metals, but it is important that if you are going to play in a volatile area such as commodities you understand that some ideas will not pan out, and that you manage risk accordingly.
Okay, so non-legally required disclaimers out of the way, why do I believe that both GLD and SLV are a buy now? My last piece on the subject, in September, suggested that gold was still deleveraging from the 2010/11 bubble, the fundamentals were being ignored and it was best left alone, but at these levels the opportunity looks too good to miss.
The deflating of financial bubbles can be slow and painful as most of us are now aware, but it has been 27 months since the highs in gold and, as I said earlier, GLD is now at prep-spike levels.
We are once again flirting with the June lows around 115 and, as you can see from the 5 year chart above, that level coincides roughly with resistance and support levels from 2009 and 2010. “Roughly” may not be a word you associate with chart reading, but in my experience it is what real, in the market traders look at for trades other than the intraday. The actual high or low is irrelevant, as you will look to trade in front of it and set stops behind it, so approximate levels are fine.
I believe that gold will, at some point, bounce back, so proximity to this likely support level gives an opportunity to go long and test the water without risking too much. I have no position in GLD right now, but I intend to buy a small amount around these levels. Should the support level be broken, however, then all bets are off, so I will be setting a stop loss at about 109, or around 8% away. If that is breached, then I am back to watching and waiting.
As for the upside, my initial target is a re-test of the 140 resistance, or about an 18% profit. A reward to risk ratio of over 2:1 makes the trade worthwhile, but if the 140 level is broken, then 160 is the next stop, so that will be my ultimate target.
I have no detailed, complex analysis as to why this is the level at which gold will turn, nor do I have absolute certainty that it will. I could pretend I do, but that would be to mislead you. There is no magic formula for when an under pressure commodity or currency will turn around. It does, however usually pay to take a risk controlled bet on that happening close to established support levels. That is where we are with GLD, so, as long as you don’t get carried away, I would say that now is a good time to buy gold.