Gold saw some profit taking last week along with equities as the quarter closed out with new money waiting to get in only after a significant pullback. This has attracted buyers at the $1735 level with a nice move just above the $1782 level before profit-taking sending it to close at $1771 point for the week.
After the ECB and FOMC news briefly drove gold futures just a nudge above $1800, buyers have been lacking to push gold through this level with a bust out to test the next level of $1900 and $1920. It is this kind of momentum that will be required to make a serious push to $2000. The $2000 price point is what all the gold Bugs have said is a foregone conclusion, but has yet to actually materialize even with all the money printing, currency debasing, and outright doubts over standard measures for retaining stores of value. So far, gold has just been a trading market for the past year with sellers fading the peaks and buyers buying the dips with no long-term trend being established.
The real effects of the latest QE3 mortgage buying focus by the Federal Reserve probably have yet to be felt. The Fed is probably clever to concentrate efforts on mortgages versus treasuries, so it could be less stimulative for the commodities complex this third time around. However, things are different from QE2 in this complex due to several factors. Oil traders are worried about governmental release of SPR and slowing global economy to get too bullish in the crude market, as well as silver. Silver has had a nice move since the U.S. and European stimulus measures were signaled to the market by Draghi and Bernanke. But those measures are in some sense curtailed by the enormous margin requirements of around $19,000 per futures contract, which is higher by a large margin than any other futures contract, and is definitely too high for the market to function normally. Copper has economic worries as well with the slowdown in China, so it has upside pressures getting above the $4 a pound level.
So some of the momentum that was helpful with the commodities index`s buying activities the QE2 run-up may be lacking this time around leaving gold on its own to do the heavy lifting. Make no mistake, gold has held up a lot better than oil, silver and copper due to the aforementioned factors. Nevertheless, the lack of runaway bullish trends in these other commodities has provided a headwind for gold to break out above $2000 an ounce as many analysts and pundits have been forecasting for the last 16 months.
There are also physical demand constraints at the higher prices as buyers of the physical commodity don`t want to pay up for metal due to the higher capital requirement. Whether we are talking about Indian consumers or central governments, in some sense, they are still stuck in the midst of the deleveraging phase, and that means high prices still provide a disincentive to buy the physical commodity.
Then there is the factor of market intervention. Historically, there has been some unusual central Bank and governmental intervention in the form of selling at questionable times that continually seems to be a headwind over the market. Whether these are complex derivative plays by central planning, outright manipulation of the market, or just taking advantage of high prices to sell into the market to raise cash, it remains a concern at the top of the gold market.
Remember, gold has also benefited with all the miner strikes in South Africa and the rest of the world. Once they are addressed, some of the "Strike and Upheaval Premium" could weigh on the market to the downside. Another factor to the downside to be worried about is that equities have not had a significant pullback during this QE infused rally by Central Governments. What happens when equities pullback and everybody runs for the exits at the same time? For example, the fiscal cliff or another downgrade by a major rating agency literally could happen in the next six months at the drop of a hat leading to all asset prices selling off as investors and fund managers move into cash.
So until further notice of a market breakout, gold is just a trader's market -- Buy the dips with stops just below major support, and sell the rips with stops just above major resistance levels. If you are more aggressive, you can play tighter time periods of buying smaller dips and selling smaller rips with stops above and below key weekly chart levels, which is what a lot of day traders employ as a strategy.
Longer term trend traders will probably not get interested in the gold market until $1800 is breached with significant confidence to the upside. The downside has major support at the $1500 level, but for the most part the trading range has been between $1800 on the upside with 3 major retrenchment moves from this level during the last 12 months. The bulk of the downside moves are finding support at the $1600 level with 3 distinct measured moves breaking at times below the $1600 level, but quickly retracing back above the $1600 level.
When markets sell off, stops get hit, panic ensues and we have had several touches down to the $1540 level. But price doesn`t stay there for long, and is quickly brought back up through short covering and additional bottom feeders, who have been quite successful in this strategy over the last year as $1540 has been quite a profitable entry point for these traders.
A convincing break below the $1535 level on the downside would signal the gold market is officially broken, which will attract many more sellers than buyers. The stop run alone could be a $100 move to the downside, which could be fueled by anything from a global recession to some region imploding with insolvency issues, to a sudden rise in interest rates to combat inflation that has caught central bankers way behind the curve. In that case, central bankers could play catch-up in raising rates multiple times by 50 and 75 basis points at a time in consecutive months.
For investors who want to play in these markets through ETFs, the most common are the GLD for Gold, and the SLV for silver. SLV enables you to play the gold or silver market without the ridiculous margin requirements of the futures contracts for silver.
By the way, the silver market is some $15 off the highs established during the peak of the silver frenzy before margins were raised because of a couple of 6% and 8% moves that had brokerage houses and exchanges cringing.
But silver has had a nice move along with gold going from $28 an ounce in mid August to $35 an ounce in just over a month`s time on September 21st catching on the back of the stimulative measures coming out of the Central Banks of the world.
In regards to technical entry and exit points for the ETF`s just pull up a futures chart and an ETF chart of the same commodity, and you can find the comparable key technical levels just outlined for the Futures contracts.
Silver is basically just following gold`s lead with a lot more volatility due to the nature of the liquidity in the contract -- there is a lot more liquidity in the gold market as compared with the silver market to absorb buying and selling pressure. So keep that in mind when trading silver in either the futures or ETF method.
Nonetheless, make no mistake after the initial run-up in the precious metals, this is strictly a trader's market. The big funds like exposure to the sector, especially regarding the global debasing of currencies, but they are basically stepping away from these markets until a defined breakout occurs, and are only stepping in ounce a substantial pullback has occurred like the $1740 level of the past week.
Take this level with a grain of salt though, as we were still in the midst of the third-quarter window dressing close out and no real, prolonged selling occurred in asset markets. I seriously doubt this level would hold on a substantial sell-off in equities of 10% or more. Watch for levels that seems to find support, and then come in and buy with a stop just below that support level, and you should be fine from a risk management standpoint. But definitely use stops or don`t trade these markets!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.