What Do Global Events Mean for Gold?

 |  Includes: GLD, GLL
by: Carlos X. Alexandre

Gold’s price action on Friday, February 11, was interesting to watch, especially because everyone was waiting for news out of Egypt. Finally, Mubarak left and the commodity started its descent from the $1,360 level, having hit $1,369.70 at 8:30 am. The drop was orderly and moved below a trend line that I drew, extending exactly 30 trading days prior, to January 3, 2011. Gold closed at $1,360.40, although the last Globex trade was $1,356.

Gold 5 minute - 2-14-11Click to enlarge

click to enlarge

To bring perspective to the price movement, Mubarak’s exit and the turn of power over to the military in Egypt allayed Western fears of a theological government — at least for the time being — and the markets celebrated, sending the dollar and equities up.

The fear that an anti-western government would choke the oil supply is, in my humble opinion, misplaced, because whomever is in power needs the revenue (unless we think of Osama, for whom a cave will do, and the excessive gold ornate furniture is not at the top of the list). Is Iran, or Venezuela for that matter, the weekend drinking buddy that we would like it to be? No, not really. But if the supply is disrupted it is because of chaos, not hate toward the West, which is well manifested day in and day out.

Algeria is now on the “revolution” map, but I’m holding my breath to see what happens to Ahmadinejad, as he stated that “the uprisings in the Arab world have been inspired by his country's struggle against Western powers,” according to the Washington Post. Instability in Iran would be a short-term game changer.

In addition, and as reported by the Financial Times over the weekend, the Egyptian army will abide by the previous treaties, further removing the fear premium.

Egypt’s new military rulers said on Saturday the existing cabinet would stay until a new one was formed and the country would respect international treaties, a statement that will reassure Israel and the United States.

On Sunday, the military suspended the constitution and dissolved parliament. Why all of this? Because instability is the core driver behind the price of gold.

Going west, and considering that the euro has been a catalyst as of late, the news that the European Central Bank was literally forced to buy Portuguese debt according to the Financial Times did nothing for gold, as if the European crisis is now old news. Nothing is moving it, apart form short covering that has probably run its course for the time being. For some, it’s the proverbial time to buy the dip, and if dip-buyers don’t show up for the party, they’ll have another opportunity at a lower price.

Between mid-October and the end of December 2011, gold always recovered within 15 days or so and I have a feeling that some holders are getting impatient and may throw in the towel. For the record, the SPDR Gold Trust (NYSEARCA:GLD) is exhibiting slightly more weakness than the futures. A little in the immediate future, if gold closes below the $1,340 level, the $1,270 looks like the floor that will hold the weight. Below that, $1,190 looks like the zone to buy more on the dip for those so inclined. On the upside, certainly the sky is only limited by the number of buyers queued at the cash register, although $1,420 has proven hard to overcome.

If gold fails to clear the $1,367 mark on Monday or Tuesday, the Proshares UltraShort Gold ETF (NYSEARCA:GLL) is one of the financial instruments to be played seeking the $1,300-$1,307 range, especially if gold goes below $1,350 and GLD starts to crack and needs to unload a truck full of wedding rings. With gold above $1,367, the play reverses.

What about the long-term? In the long run I am only certain about two things: death and taxes. And due to technological innovation, I’m not so sure about death.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD, GLL over the next 72 hours.