Daily Gains Letter

Looking for a Good Gold Play? Here’s What to Watch For

By for Daily Gains Letter |

Looking for a Good Gold PlayI have not talked about gold for some time, as there has been no reason to get excited about the yellow metal. Yes, it’s shiny, but it doesn’t appear to be sparkling at this time.

After the gold bugs got excited about the opportunities in the precious metal, pushing prices to above $1,300 following the onset of geopolitical issues in both Ukraine and the Middle East, the aftermath has been dull.

As I said back in June, the only reason I would trade gold would be to buy on weakness near $1,200 as the fundamentals, in my view, are irrelevant at this time. Gold still seems to be more of a geopolitical trade. (See “How to Make Quick Profits in Gold at This Time.”)

Look, there’s no big buying from India; China is buying, but it is simply not enough to sway the global supply/demand balance in favor of the yellow precious metal.

Gold Bugs Index Chart

Chart courtesy of www.StockCharts.com

Consider the fact that the greenback has been edging higher, with the U.S. dollar index at its highest level in more than a year. This move makes the dollar-denominated gold more expensive for foreigners, who have traditionally been major purchasers. The end result is a letdown in demand for the yellow metal.

In my view, gold is simply a trade on the geopolitical risk, as there’s really no major reason to want to buy at this juncture, given the market’s underlying fundamentals.

The gold bugs clearly don’t want to hear this, but I believe that unless the situation in Ukraine or the Middle East worsens, prices could head lower, towards $1,225 or even $1,200. And failure to hold at that level could see the precious metal fall to the $1,170–$1,180 level, which offers some technical support.

Gold Spot Price (EOD) Chart

Chart courtesy of www.StockCharts.com

As I just talked about, the technical picture on gold looks to be signaling additional downside moves ahead. Since trading at more than $1,900 an ounce years back, it has been a difficult path for investors as shown by the chart above. This precious metal remains in the realm of traders.

The above chart shows a potential move towards $1,250 and $1,200, but this depends on what happens in Ukraine. Assume Russia decides to increase its influence in Ukraine; this would result in further economic sanctions against Russia, which would also hurt the eurozone due to the degree of trading that usually occurs between Russia and Europe. Last week, the European Central Bank (ECB) cut interest rates and increased stimulus in hopes of saving the fragile economy. A blowup in the Ukraine/Russia tensions won’t cause a long-term rise in gold prices, but it would likely drive up buying in the precious metal and the risk premium in the short term.

However, in the absence of further turmoil in Ukraine, gold prices could deteriorate to below $1,200, possibly even $1,180, a level last witnessed in 2013, according to my technical analysis. Support here could see a rally and a decent trading opportunity for those looking for a potential bounce.

To play this possible downside move, consider an exchange-traded fund (ETF) like SPDR Gold Shares (NYSEArca/GLD). I would monitor this ETF, looking for a potential trade on weakness as prices move downwards toward $1,200 an ounce.

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Tags: , , , , , , , , ,