Gold Swerves to Avoid the Cross of Death


"As investors, maybe we need to consider the possibility of an extended period of consolidation with not much more to look forward to than range-trading and sideways movement."


Despite the turmoil in the world, gold prices appear to be range-bound between $1800/ounce (oz) and $1550/oz. Many are predicting a rapid move north, given that the money printing machines are working overtime, debasing all currencies with the eventual outcome being the appearance of the inflation monster. Some are even looking for a black swan event to provide the ignition required to set the precious markets on fire.

These events may already be baked into the cake—QE3 for instance. It has been coming for so long that it could now be a case of buying the rumor and selling the fact, should it arrive. A black swan, such as a conflict with Iran, has been trailed for some time now, so again this will not be a surprise for the markets. It will undoubtedly have some effect, especially on the price of oil, but the disruption would be short lived as preparations have been made to keep the Strait of Hormuz open and operational. And who knows, maybe common sense will prevail and a mutually satisfactory compromise can still be found.

As investors, maybe we need to consider the possibility of an extended period of consolidation with not much more to look forward to than range-trading and sideways movement. If this is the case, then in terms of actionable allocation of our cash, it would suggest to us that we hold onto our core positions in both the precious metals and mining stocks. However, we should—and have—resisted the temptation to increase our exposure by making more acquisitions in the mining sector, as the risk/reward environment wasn't in our favor. We have been advocating for over a year a policy of keeping our powder dry and apart from the occasional foray into the options market this strategy has paid of handsomely so far.

Anyone who follows the HUI will know that it is back trading below the 500 level, which is where it was back in 2010, so for us to have been on the acquisition trail over this period would have been damaging to our financial health. We should also mention that many of our peers are anticipating a large move north for mining stocks and they may be correct. Again though, the essence of a good decision is timing and we are of the opinion that the "time" is still in front of us and not behind us. So don't panic—you have not missed anything, other than to watch household names in this sector become even more attractive as a purchase as stock prices crumble. Indeed, it is hard sitting on one's hands at times like these, but as they say: Patience is a virtue.

Taking a quick look at the chart above we can see that gold prices have only just managed to avoid the cross of death, as the 50-day moving average (dma) almost crossed over the 200-dma in a downward movement, but managed to swerve at the last minute and live to fight another day. Had the crossover taken place, then one would have read this event as a negative for gold. This is, of course, only one of many indicators and none of them are 100% accurate. However, some traders may well have been guided by any such event, which to their way of thinking would have triggered a sell trade, thus putting even more downward pressure on gold. The technical indicators are now oversold which suggests a near term bounce.

For the hyperactive short-term traders among us this could be a trading opportunity, for those who are nimble and aware, with a cast-iron gut to match. If it all goes pear-shaped then at least you will be the proud owner of a few shares that were on your buy list anyway.

For now we will continue to look for absolute bargains and we will try to be patient enough to wait until what's on offer is real steal.

Bob Kirtley, SK Options Trading

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Disclaimer: or makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level or risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is not a guide nor guarantee of future success.

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