In my opinion, gold is at a critical juncture. There are any number of reasons for the decline in gold of late, not the least of which is the truism that sellers are more anxious to sell than buyers are to buy. As to why that may be, I like the idea of a decrease in risk aversion. That is, gold has been a safety play of late, and with both economic news becoming less worse and stocks improving a bit, I like that explanation. It may also be that, as a result of the G20 meeting, some nations are looking to sell some gold. Some commentator smarter than I will be able to look at official figures and determine that.
Our vehicle of choice for gold investments is what we refer to as G L D, the ticker for the SPDR Gold Shares (more information here). The shares trade at approximately 1/10 the price of an ounce of gold, so you can apply that to any prices in this post, all of which refer to GLD.
For a couple of months now, we’ve had our eyes on $85 as an important support level for the yellow metal. That figure is coming into play today as the stock has gapped down (opened below a prior close) from Friday’s close. You can see this action in the accompanying price chart. The 200-day moving average (yellow dotted line) and the 117-day moving average (green dotted line) are presently providing support to GLD. If it’s unable to hold $85, look for it to fall to and/or take a breather at $80, then $75, and then $70 . . . or lower.
$80 will be important because its the 61.8% Fibonacci retracement of the move from the October lows to the February peak. In the Fibonacci retracements, 61.8% and its complement 38.2% are important levels. I’ve highlighted those two on the chart. You can see that today’s gap was over the 38.2% retracement level.
Aside from the fact that, thus far, GLD is holding $85, there may be one other positive development, although as the day passes, that possibility is waning. Notice the highlighted price patterns in early December, mid-January, and mid-February. In candlestick charting, those are referred to as hammer patterns. Bears initially have control of the security as evidenced by the long lower tail, or wick. Somewhere in the course of the action the bulls take over and close the stock near where it opened, resulting in what looks like a cross or, more vaguely, like a hammer. You can see that past hammers have been resolved in a bullish fashion.
While gold may plumb the depths in the coming weeks and months, we expect it come roaring back at some point in the future when the chickens of the Government’s deficit spending and quantitative easing come home to roost.