Whenever I'm faced with a major change in my opinion regarding
themarket 's long-term direction, I think of the English punk
band the Clash.
In particular, the 1980s hit "Should I Stay or Should I Go"
comes to mind. With apologies to the song's writers:
"Should I buy or should I sell? If I buy, therewill be
trouble / If I sell, it will be double."
Thinking of these altered lyrics might be a nod to being
obsessed with music during my adolescence. It might also be a
signal that it's time to make a change. I like to think of them
as the latter.
Over the past week, I thought of those lyrics when looking at
. Regular StreetAuthority readers will remember my April 29
article on the precious metal. I had forecast that gold would
drop below $1,200 an ounce before bouncing higher. This is
exactly what has occurred with goldfutures dropping to $1,179
prior to bouncing into the $1,250 range seven sessions
This has led me to turnbullish on the yellow metal. My
boldcall is that gold will climb back above $1,400 an ounce prior
to it dropping below $1,150. Here's why:
The Options Market
Tradingvolume in call options on
SPDR Gold TrustETF (
have just soared to its highest level in over eight weeks.
Call options are bets that theunderlying security
orcommodity will increase in value. A sharp volume increase
in call options can signal that professional traders are
expecting additionalupside in the commodity. Remember, this
is despite the rising short interest in the precious
Whenever short interest reaches an extreme level, it can be
a signal that the commodity or security is oversold and
ready for a bounce higher. Presently, short interest in the
SPDR Gold Trust ETF is about twostandard deviations
higher than average.
In addition, COMEXnet long positions for large speculators
recently plunged to multi-year lows, down 79% from the
first of theyear and 90% since the summer of 2011. Such a
sharp change in positions can often foretell that the
opposite move is about to occur. Speculative shorts in the
metal have reached such a level that it has become an
overly crowded trade.
Lower Prices Increase Demand
Demand around the world is spiking in response to the lower
prices. Consumers in Vietnam are flooding stores to
purchase gold bullion. Turkey imported 44 metric tons of
gold in June, increasing demand in the world's
fourth-largest consumer of the precious metal . Not to
mention that in the first five months of this year, China's
gold imports have already doubled last year's
The Technical Picture
Taking a look at the past 90 days, gold prices have
experienced the 16th worst drop since 1968. It has
rebounded each of the subsequent 90-day periods, with an
average increase of over 20%.
If we take this observation as being predictive, it may
signal a bounce into the $1,414 range. In addition, there
is a multi-dayconsolidation zone in the $1,400 area. It is
my thinking that this type of consolidation zone can act as
a magnet, pulling the price back to that level. The
combination of the increase after a 90-day decline with the
consolidation zone being in the same relative area paints a
compelling technical picture of this bounce continuing
Risks to Consider:
Anything can happen in thecommodity market . My analysis
makes solid sense now, but in light of a variety offactors -- the
uncertain worldwide economic environment, the Federal Reserve's
lack of clarity on its timing for ending monetary easing
measures, interest rates changing, andcurrency fluctuations among
others -- it's very difficult to accurately forecast gold prices.
Be sure to always use stops and position size properly whenever
entering a speculative long position.
Action to Take -->
Entering gold now with stops at $1,170 makes both fundamental and
technical sense. I expect to see gold back above $1,400 prior to
another substantial downwave .
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