Gold futures took a huge plunge lower, losing almost two percent of their value Tuesday as downward pressure in the yellow metal was unrelenting, despite a strong stock market rally and a weak U.S. dollar. Recent attempts in the last few sessions by the bulls to take gold above the $1,700 level seem to have been met with increased selling pressure with each attempt failing to pull the price higher. In fact, since last week’s FOMC announcement of QE4, any rallies in both gold and silver seem to have been sold into, with lower closing lows as the end result.
Today’s price action, in my view, supports two possible reasons we saw the huge dip. One being technical in that a large amount of sell stops were triggered at three price levels. The first level, at $1690, is a daily support level where stops might have been triggered. Next possible stops were set off below at the $1683.4-1682 level, which was a weekly support level, and then finally just below the $1669-1670 level, a second weekly support level and a level representing the 200-day moving average. Secondly, the precious metal market may be eyeing the U.S. “fiscal cliff debate,” for possible tax increases and spending cuts that could be fast approaching.
Early this week there has been significant movement on the Republican side toward more of a middle ground, which suggests both sides are coming closer to a deal, but not that close yet. This may have given the U.S. and world stock markets a possible boost early this week. The marketplace, in my view, still believes the odds are higher than not that there will be a last-minute agreement among U.S. lawmakers to avoid the fiscal cliff. However, the uncertainty of possible tax increases in 2013 may have driven recent and long term gold bulls to the sidelines. The declines in price today were an eye opener, considering outside markets that I believe usually propel gold to the upside, (indices, currencies, energy) finished higher on the session.
LOW RISK/HIGH POTENTIAL REWARD
I believe once the dust settles from all the negotiation, this recent dip may be a buying opportunity in gold for investors heading into 2013. Conservatively, on a long term position trade, I would be looking to buy the April Gold 1800 call and selling the April Gold 1850 call for 4.5 points or a $450.00 risk. The risk is the price paid for the spread plus all commissions and fees. The maximum profit you can collect here is 5,000, minus all commissions and fees. I am looking for gold to strengthen into the first quarter of this year and possibly challenge 2012 highs.
I believe this is a good low risk high potential trade that shouldn’t eat up margin or buying power to day or position trade in the futures markets.
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