Wednesday, April 2, 2014

Unfounded Optimism? Am I a Gold Bug?

Gold has been on a huge correction since mid March. After hitting 1392, just shy of 1400, it promptly reversed and has been plunging lower since then. No help of course to the monkey hammering in the markets. I wouldn't be so bummed out if I hadn't averaged into a lot of my positions in mid Feb in my miners.

As you can see from the blue circles and lines (just to help me point it out to anyone who cares), I took 2 previous opening positions in gold, late Feb and early March. They aren't doing too well for me now. However, after looking at roughly 12 days of heading lower, I feel that the market is definitely oversold in the short term. Therefore, I opened up another small long position in gold today.

Looking at the chart from a bigger picture, outlined in the big white circles is a big H&S bottoming pattern. I'm not very keen on it, especially since the June low is actually the same level as the head, which weakens that thesis for me. However, the current price of 1280 in gold now is the last line of strong defense for the gold bulls. If it does hold (and I did just bet that it would), this would nicely carve out a big H&S pattern with the neckline being the 1400 level that it failed to break in mid March. So test 1 is holding this shoulder bottom, test 2 is breaking out of the neckline. I do think that gold really bottomed out in December and that we will not be seeing those levels for quite a while. However, better to be flexible with your thinking and still have your wallet on you, eh?

If this 1260-1280 level doesn't hold, I'll be exiting my Gold position and looking either for a triple bottom retest, or even 1 final plunge lower. Miners I will still keep though. Surprisingly in the past few days they have been quite resilient although gold was weakening. I think a lot of people are realizing that miners themselves are cheap relative to gold, and if gold is cheap to relative to the market? Double levered value play!

As much as I would like gold to breakout to the upside and perform well within the next 2 years, I think the biggest factor regarding that would be the amount of fear and uncertainty there is in the market. So until the markets start wavering a little, I don't see how gold will be making fantastic movies. Unless of course, the smart money is frontrunning everyone again, rotating out of risk assets and fortifying for a tough few years ahead. I wonder how many people will be on that line of thought.

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