In my recent article, "Gold, Sell It Before Wednesday's Fed And Buy It Back After," I advised traders to sell gold ahead of Bernanke's Fed press conference.
The rationale was simple: the market expected some sort of "flow" (balance sheet expansion) round of quantitative easing, as opposed to the simple continuation of operation twist. While the initial reaction in the gold market was quite severe to the lack of significant QE, gold bounced slightly to end Wednesday with only slight losses. After a night of global digestion, however, bulls capitulated sending the metal down a couple of percentage points.
(click to enlarge)Since then, the Gold ETF (GLD) has recovered marginally. I've been impressed by the price floors shown in the price of gold, and they've been telling of something far more important that short-term support.
Put Your Ears To The Track
While charts a great way to see where the market has been, a look at the dynamics of headlines, investor sentiment, price movements, and macro data in the aggregate are the best way to judge whether the long-term trend is intact.
Sure, GLD bounced off the $150 price area three times, showing strong support. That's great for shorter-term bullish traders since buyers seem to step in as price support there. However, the market reaction to the events in the last few weeks is telling an even better story.
Despite the unwillingness of the ECB or the Fed to engage in large-scale asset purchases, the price of gold has remained remarkably resilient. Of course, everyone knows that QE and LTRO have been huge catalysts for the rapid price increase of gold over the past few years, but the recent lack of these programs hasn't broken the gold market.
Why? It seems central banks and private investors see $1,550/oz as a good price to purchase gold en masse. With no foreseeable QE or LTRO priced into the gold market now, the fact that it hasn't tested new lows tells us that there are much greater forces at play. Throw in the fact that the USD is receiving massive capital inflows, and gold's price resiliency is even more impressive.
Catalysts Going Forward
Eventually, with a lack of incremental cash being plowed into the system, markets will deteriorate to the extent where central banks will have no choice but to print. With significantly lowered expectations of LSAP priced into the market now, we have an excellent entry point at $154 on the GLD. When these programs resume, gold will see 10-20% upside.
The lack of safe-haven assets also make gold an interesting investment for periods of volatility. While the dollar, treasuries, and German bunds have acted as safe-haven assets over the past few months, their relative values are extremely stretched, and based on the price action in gold, investors seems to be dipping back into the precious metal as an alternative to these overbought assets.
Thanks to greatly tempered expectations now priced into the gold market and the aforementioned catalysts for price appreciation, a long trade in GLD or gold futures is highly advised.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Long GLD Calls