Seeking Alpha

Gold Approaching Buy Zones Again

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Includes: DGL, DGLD, DGP, DGZ, DZZ, GLD, GLDI, GLL, IAU, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Kirk Spano
Summary

The rally in gold, like everything else, has been extreme.

Gold is letting some air out now, and I have identified some buy zones.

For those who sell cash-secured puts, I have included some simple strategies.

You also can certainly buy gold near the price levels I identify.

Gold and gold stocks are likely to be top performers in the 2020s. Gold will rise as central banks and governments increase money supply causing inflation in assets. Gold also could rise later in the decade as supplies flatten.

That's the abbreviated gold thesis. The longer version is here:

Massive 2020s Gold And Gold Stock Bull Market Is Just Beginning

iShares Gold ETF (GLD) Trends

Although most of you don't trade much, knowing what the traders are doing is valuable information. Day and swing traders have gold pegged at going down to about $155. Because they are positioning that way, it's almost a self-fulfilling prophecy.

The traders are using much shorter time frames that I use. I measure trading data in days, weeks, and months. I will use the hourly and four-hour charts to confirm things when very close to making an entry or exit.

What's likely to happen with GLD is that the traders will drive it to about $155 imminently. Then, there will be a very short bounce as traders take profits, likely lasting hours, and then a resumption of the downtrend.

Gold GLD

There's a major historical support line near $142. That's a Fibonacci level related to the gold peak in 2011 to the gold trough in 2016 that I'm using as my baseline (marked with my yellow line). You will see some jitterbugging action around that level a few times. That level is not the strongest of supports though.

The next big support, marked with my red line, is the next Fibonacci level down at about $133. When you eyeball the chart, you can see how price often coincides with about those levels. This is clearly a stronger structural pricing area.

It's important to use the correct Fibonacci levels when building it into your technical analysis. The telltale gives away that you are using the right "Fibs" is if price levels hit around those lines multiple times. That indicates a truer support level as more people are indeed gravitating to those price areas repeatedly.

The yellow box is what I consider my base case on GLD. This is where I'd like to open or add to a position. I consider my base case to be 50%-70% likely to occur. The levels above our base case box are the majority of the remaining likelihood to occur.

Near the bottom of the chart are other Fibonacci levels and my "green line" that represents what I consider the Armageddon scenario. I think it's less than 10% likely that gold price heads that low, but it's something to consider if you have reason to be extremely bearish.

On the right hand side of the chart are shorter-term and more recent Fibonacci levels. Those are what shorter-term traders are trading around using other technical methods as well, i.e. Elliott Waves, RSI, MFI, MACD...

Shorter-term signals will give us a clearer view of which scenario is playing out when we get to key market levels. Those are the days and weeks to focus more on things like money flow and momentum. In the case of gold, MFI has been consistently higher than RSI. This is a sign of strength. That tells me that I might need to be flexible about my base case.

As position traders, looking to hold for six months to years, MoSI members need to wake up around the bigger structural support and resistance levels. Only near those points do the short-term items have significance as they can indicate if the bigger longer-term levels will be broken in one direction or the other.

Getting Into GLD

As a risk-averse investor, but bullish on gold, expecting $3,000 gold by 2026, I'm planning to get more involved with GLD around $142. This is lower than today, near what I consider a likely bottom, but below today's potentially too high short-term prices. If you are even less risk tolerant, then wait until closer to $133 to get involved.

My likely move will be to sell cash-secured puts to early autumn with a strike price of $140-$142. The exact contracts will depend on liquidity at the time. My hope is to get enough premium that my net purchase price if the contracts are put to me, is close to $133. In this way, I'm pulling in premium, have a decent chance with the puts being assigned to me, which I'd be happy with, and a net cost basis near the bottom of the range I have identified as longer-term support.

For those who don't want to miss out on owning some GLD, selling cash-secured puts with a higher strike price also is something to consider. As GLD falls in price, there are several support levels layered up rather close (a confluence in technical jargon) together from about $151 to $146. You could certainly sell puts with strike prices in that area as those prices hit. Being more aggressive, you would likely only be looking to get an "after premium" cost basis around $142.

I'm planning to use early autumn puts due to uncertainty around the elections. History has shown that's a time to reconsider positioning.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment but publish separately from that entity for DIY investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.