- Long consolidation period for gold.
- Multiple lows above and below $1,290.
- Who is supporting gold at this level?
- Strategies to participate if gold rallies.
During the last seven trading sessions (including Wednesday), gold futures have one familiar theme: A buyer or group of buyers around the $1,290.00 level.
It is not difficult to identify that buyers have targeted the area to either bring in shorts or to build a large long position.
Of course, for every buyer there is a seller, so investors could easily take the converse side of the argument that short-sellers are defending the psychologically important $1,300.00 resistance level, limiting the bullion to only one close over that level during the last 10 trading sessions.
However, for the sake of argument, this article will approach the issue from the bullish side and attempt to determine who the mystery buyers are and why.
Is it Warren Buffett?
No. The "Oracle of Omaha" despises gold as an investment vehicle and is not afraid to share this opinion. Being that Buffett is one of the world's richest investors, it is hard to ignore his opinion. Buffett's premise is that gold is a non-productive asset because it does not produce anything of value.
Simply stated, Buffett prefers productive assets like farmland or companies that create wealth for shareholders. For example, Exxon Mobil (NYSE:XOM) or Coca-Cola (NYSE:KO) produces goods that people want or need and have profits to prove it. "People will forever exchange what they produce for what others produce," says Buffett.
Is it the "little guy"?
No. Most investors do not dabble in the commodities markets. In fact, many investors' exposure to commodities comes from the movie "Trading Places" (starring Eddie Murphy and Dan Aykroyd), who team up to seek revenge on the Duke brothers for their attempt to alter the course of their lives.
Also, the "public" tends to get invested at the end of moves and since gold it still way off its September 2011 high ($1,949.90), the average investor pays little or no attention to it.
Finally, the margin requirements and volatility of the contract are a strong deterrent to many investors.
Yes. Investopeida describes the term as a classification used by the Commodity Futures Trading Commission (CFTC) to describe traders that use the futures markets primarily to hedge their business activities.
It goes on to explain that this includes futures commission merchants, foreign brokers, clearing members or investment banks that buy futures to speculate or as a hedging vehicle. An increase in commercial traders' long positions in a particular commodity may mean these traders believe the price of the commodity will increase, in which case they would not want to be adversely affected by missing out on a price increase.
Steve Briese's Commitment of Traders newsletter is by far the most followed source and often predicts big moves in the commodities well in advance. Traders anxiously await the next report to observe whether or not there has been a significant increase in the open interest by the "big boys."
So now we have speculated who may be buying, what are the potential catalysts they have identified that will ignite a rally?
At the top of the list has to be the Ukraine-Russia predicament. Although Russia has not revealed how far it is willing to go to defend its stance, the US has clearly stated that it will not tolerate Russian aggression in the region.
An extended decline in the U.S. stock market?
Many investors have been anticipating this for quite some time and the market has ratcheted higher. If the market has a "Black Swan" occurrence, there could be a flight to quality in assets such as gold.
Finally, Tyler Durden of Zero Hedge has taken note of the deal between the Bank of China and Russia's largest bank, VTB, that will mandate payments in each other currencies. Durden added, this agreement "bypasses the need for US Dollars for investment banking, inter-bank lending, trade finance and capital-markets transactions."
As tensions between US and Russia escalate on the economic front ahead of any military confrontation, Russian-Chinese relations are moving in the other direction.
Gold did not immediately react on Tuesday, but caught a bid within an hour of the article being published and did not revisit the $1290.00 area until Wednesday. Despite a dip to $1,282.90, once again gold has returned to the crucial area and closed above it.
So how can an investor participate with the "big boys," if it does explode to the upside?
Since it is likely the move will take place during pre-market or after-hours trading, investors will need to be properly positioned over night in order to capitalize.
Investors may want to stay away from the miners, since all the charts appear unattractive. Instead, an investor can purchase shares of SPDR Gold Trust (NYSE:GLD). A similar technical pattern is taking place in the ETF and the corresponding level of support resides at $124.00.
Of course, gold could just as easily gap down as well, so options on the GLD may allow investors to participate on the upside with defined risk on the downside. Keep in mind, timing is a component in options trading and it may take a few attempts to finally catch the move if it comes to fruition.
Finally, gold is in the midst of its longest consolidation period since the beginning of the year. In January, gold meandered between $1,212.00 and $1,255.00 before resolving itself to the upside.
Over the last twenty-four trading sessions, gold has been range bound between $1,268.40 and $1,315.80, recently holding up in the upper-end of the range.
If trying to pick a bottom is not your cup of tea and break-out trading is, a clean break out over $1,315.80 could indicate a rally back to the high of the year at $1,392.60.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.