The truth about the precious metals is that they represent such a small corner of the investment universe no one should really pay them much attention.
When you consider that the 25 biggest gold miners on the planet collectively don’t even possess the market cap of Apple Inc., you begin to understand that the consideration this quarter garners is entirely out of proportion to its relative worth in dollar terms.
Yet gold will always remain a focal point for investors and traders because its millennia-old allure is not measured in dollars.
Gold transcends time. For many, gold transcends money. Why? Because gold is not given to the transient comings and goings of the latest investment fad, of the Polaroids and Edsels and hoola-hoops of this world.
As the chart below shows, the cornerstones of American business will rise and fall, and in no time at all are gone with the wind.
DOW COMPONENTS, 1959: Where are they now?
Gold, however, is now in trouble.
And even the gold bugs see it.
After staging a three-month-long attempted comeback from its previous lows in March, the shiny metal has now succumbed to the forces of gravity, disinterest and outright loathing, plumbing once again to new lows. The bear market is therefore still in force, though in our opinion, the bottom for the metal is now finally in sight.
We feel this will be the last swoon for gold and silver, the move that makes orphans of the gold bug set and creates a tremendous money-making opportunity in the precious metals that’ll dwarf gold’s multi-year year run-up through 2011, seen above at left.
But for now, lower prices are in store.
- After cracking through support at 110, the next major line of defense emerges at GLD 70, the 2008 bear market bottom. And that’s a long way down.
- And we’ll most certainly be headed in that direction because there’s absolutely no sign of panic yet among investors. To wit, volume
numbers have remained constant to lower ever since the latest down-leg began back in January (in blue).
- We also see little sign from the RSI indicator that a near term low is at hand (black circle) – indeed, we see plenty of space for RSI downside on
Now, granted, this is a weekly chart, and the daily chart does indicate some measure of selling pressure and an oversold RSI. But after four years of declines, my friends, you can be sure that we will get a weekly oversold read on the RSI before this is through.
Where’s the Bottom?
As we’ve stated numerous times, it’s more than likely we’ll see some sort of low just below $900, as that’s where the simple Fibonacci retracement level for the metal resides. Whether she bounces higher from there for good or just pauses before tumbling still lower is not for us to say. We’ll have to check the technicals and sentiment levels at that stage and, of course, gauge exactly where the rest of the financial world is situated before we make any pronouncements.
As we’re wont to say, all these levels are ‘moving targets’, and we can only know when we arrive there whether there’s more to come on the downside or it’s safe to start loading up again.
In the meantime, of course, there’s money to be made from gold, and, as usual, we’re using the SPDR Gold Trust (NYSE:GLD), that most eloquent investment proxy for the physical metal, as our profit-making vehicle of choice.
Let’s take a moment to glance at a shorter term chart of the metal to gather our bearings.
Below is six month’s worth of trade on GLD, and as you can see we’ve broken below support at the former lows at $110 (in red). Moreover, we also have all the moving averages unfurled and streaming lower, a very bad sign for those hoping for an imminent rebound.
Take a look –
The chart is outright depressing for the true-believer crowd. But not to worry, race fans; every dog has his day. It’s just that this puppy’s gonna need some patience.
1. This week’s decline is shaping up as a runaway gap (black square at top), a formation that generally doesn’t look back. Rather, in the short term, at
least, it tends to gather momentum.
2. Daily volume is also picking up, a sign that we me be seeing the beginning of a capitulatory event, and one that generally brings with it an avalanche
If it’s the case that we’re in the midst of a genuine bottom here, then volumes will have to expand significantly. If it turns out to be just a three or four day selling affair, which we fully expect, then count on lower prices – possibly deeply lower – in the months ahead.
That said, the fall below RSI 20 (black box at bottom) indicates that we’ll likely get a short term slowdown in the selling. And while we may not get a full scale reversal at this stage, counting on those aforementioned declines over the next week or two may lead to disappointment.
Our Best Estimate…
The selling happened. It’s going to abate for a spell. But it should resume in force before too long.
To that end, we’ve custom tailored a trade to exploit that precise outcome.
On one side, we’re going to take advantage of all the current volatility in the precious metals market by selling CALLs on GLD. As volatility rises, the price of options explodes, and a savvy trader capitalizes on that by selling premium.
We’re then going to apply those funds toward a longer dated purchase of PUTs on GLD, thereby cutting our costs drastically for the opportunity to play for more downside.
And it goes like this –
Options Trader Elite recommends you sell four (4) GLD August 28th 108 CALLs for $0.50 each and buy the GLD December 95 PUT for $1.55 for a
total credit of $0.45 on the trade.
With kind regards,
Hugh L. O’Haynew, Senior Analyst