Gold Prepares for Another All-Time High
Source: Sam Kirtley, SK Options Trading (8/9/10)
"Prices bounced back this month; gold now only $60.00/oz. off its high."
We are of the opinion that all is not well; hence we are very bullish on gold. Technically speaking we think gold has massive support from $1,160–$1,140, where various support levels are converging. The most important of those is the 200-day moving average, which has been a solid support for gold during its bull market run starting in 2001.
We expect gold to embark on a major rally, beginning within a month. However, despite clocking consecutive daily gains recently, we would like to see gold close above its 50-day moving average before we could feel confident that this next major rally is imminent. But we are convinced it is a question of when, not if.
One must always look at the U.S. dollar when trading gold, due to the close relationship between the two. We are expecting a slight rebound in the greenback or at the very least a pause in its decline. The technical indicators such as MACD, STO, RSI are all oversold, and the USD is sitting on a multiyear support at 80, as well as its 200-day moving average. That said, once these support levels are broken, expect the dollar to plunge south.
We currently have a significant portion of our trading capital in speculative option positions on gold; however, we also have a substantial amount of cash on the sidelines, which is earmarked for taking more long gold positions. Barring any serious technical or fundamental changes, we intend to be 90% invested in gold within a month; however, we are currently looking for the optimum time to inject our remaining cash.
There are two short-term factors that could cause gold prices to drop in the next month and, therefore, provide a possible entry point.
First is a strengthening of the U.S. dollar, which could cause some weakness in gold prices. However, over the duration of this bull market the inverse relationship between the two has held up fairly well, recently this relationship has not been so stable. We have seen gold rising with the USD strengthening, for example during the height of the Greek sovereign debt crisis, so it is of course possible that with the U.S. rebounding gold prices could continue to rise.
Secondly, the infamous selloff in gold around options expiration, which appears to be occurring remarkably often, could temporarily knock $10 or $20 off the gold price and allow us to purchase our positions at a slight discount.
Given these two factors, and the fact that gold has still not posted a close above its 50-day moving average, plus August still being a seasonally weak time for gold historically, we are prepared to bide our time with regards to acquiring further gold positions.
Looking further out we see more quantitative easing, dubbed QE2, on the horizon. This is likely to occur in a similar fashion to QE1, with the Federal Reserve purchasing massive quantities of U.S. Treasuries to keep rates low and inject mountains of cash into the system in an attempt to prevent a double dip deflationary depression.
Of course, these policies will increase inflationary expectations as we expect QE2 to involve the Fed injecting perhaps another trillion dollars into the system, and money will flow to gold as an inflationary hedge. Gold will also attract more buying over the coming months as the economy begins to slide and more people realise this "recovery" was nothing more than shot of adrenaline, which only gives a temporary boost. The safe haven status of gold will come into play as investors realise that they should probably "have a bit in gold" and their combined buying power could send gold past $1,300 by the end of the year.
Whilst we are not certain that gold can reach $1,300 in 2010, we are confident that the yellow metal will reach a new all-time high by the end of the year (i.e., gold will trade higher that $1265/oz.).
In conclusion, we would suggest buying gold on any weakness this month; but, regardless, ensuring that one has a decent long position on gold in place within the next 30 days. This next leg of the gold bull market will deliver spectacular returns to those on the right side of the move, so make sure you are in place and long gold to take advantage of this major rally. Our premium service OptionTrader delivers real time signals and update to subscribers, so if you are interested in using options to enhance your returns during this gold run, visit www.skoptionstrading.com.