After a day like Wednesday in the gold (NYSEARCA:GLD) market - in which gold took a sharp drop of greater than 2% - it's useful to pull up some charts to put the move in context, and to see how price is developing. This sort of technical analysis helps us measure and observe price movement in a scientific manner, which can help us take the emotions out of our trading and investing so that we can find underpriced or overpriced opportunities likely to give us the profits we are looking for.
Below is the daily chart. Price is below the 200 day expontential moving average, which could lead to more momentum coming in. However, we do see strong support at approximately $1607.
Here is the weekly chart. We see the price channel that has been intact since the market bottomed in 2008 is still intact, and we are quickly approaching the bottom trendline, which is just above $1600. I would expect buyers to come in and defend that trendline; from this perspective, the decline Wednesday gives us a great buying opportunity.
click to enlarge
Favorable technicals are our first sign that this is simply a retracement in a bull market, and thus constitutes an excellent "buy the dip" opportunity. Also of interest, though, is the sentiment of participants in the gold industry. Louis James of Casey Research noted that the recent PDAC event, the biggest conference in the mining industry, was marked by concerns that gold had topped and securing additional funding for mining operations would be tough. Negative sentiment is a bullish sign for contrarian investors seeking above average returns, as it suggests sellers are already in - and so it is buyers who are left.
The negative sentiment within the mining industry is particularly noteworthy when one considers the fundamentals, which are only getting more and more bullish for gold. The sovereign debt crisis continues to grow, adding more debt to the debt crisis is still the preferred policy of monetary authorities, and it is simply not going to work. The ongoing deficit spending in the US shows no signs of stopping, as well as the high percentage of US debt owned by foreign entities, makes a repeat of the culmination of the gold bull in the 70s - in which the gold market collapsed as the Federal Reserve raised rates significantly - impossible.
The only solution this time is for a new international monetary agreement which incorporates gold in some way. When we consider this, and then try to calculate the math at which point treasury departments and central banks of nations and supranational institutions can back their currencies with gold, we come up with a number that is beyond $10,000/ounce. James Turk's formula, which boils down to central bank forex reserves divided by central bank gold holdings, puts the price at over $11,000/ounce.
So there you have it: technicals, sentiment, and fundamentals are all very bullish for gold. Technicals tell us a safe buying opportunity, near the long-term trendline going back to 2008, is here. Fundamentals tell us the price needs to go much, much higher in the long run to reach its full value, and sentiment analysis gives the green light to contrarians looking for irrationally mispriced opportunities that can yield outsized returns.
Disclosure: I am long physical gold.