I am not going to tell you why you should buy gold. Gold’s rise to record highs above $1,400 an ounce has spawned plenty of articles on the subject, and if you are a gold bug, you have plenty of reasons. The main question I would like to address is, should you buy now, or wait for a further dip?
We’ve seen a 5 percent pullback since gold hit new all-time highs of $1,424.3 on November 9, 2010. COMEX December gold futures are currently trading around $1,350. You’ve probably heard many analysts recommend waiting for dips to buy. Waiting for a dip to $1,200 or even $1,225 is probably wishful thinking, but I think a move under $1,370 could be a smart buy when using leverage. However, if you have never traded gold and have not made any money on the move this year, perhaps it’s not the time to get involved and take the risk involved if the market appears to be topping.
I think $1,325 represents a good value area because it marked a quick and extreme low on November 3, when the Federal Reserve announced its second round of quantitative easing known as QE2. From that low, gold had rallied $100 in three trading sessions. There is also a trendline from July 28 that ran right to $1,325 on the afternoon of November 3. The 0.382 Fibonacci retracement from the lows on July 28 to the highs on November 9 also comes in at $1,325. For these reasons, I think $1,325 looks like a good area of support to focus on as an area to consider buying.
Let’s take a look at the ratio between silver and gold, which can also help determine a reasonable entry point if you are considering a gold buy. While not getting as much attention as gold, silver has been a big mover this year, up more than $10 to $29.34 in just three months. On this move, the ratio of silver to gold hit its lowest level since early 2008, when gold was hovering above $1,000 while silver was trading above $20. At that time, the ratio was 48.8; currently it’s near 52.5.
The 50-day moving average for this ratio is 57.8, and the 200-day moving average is at 63.9. I would like to see this ratio move up to 55 – 57 to look for an entry point in the gold market. When gold hit $1,325 on November 3, silver was at $24, which puts the ratio just above 55. Looking at the 63.9 support level of the ratio, a 50 percent retracement from the July 28 lows to the November 9 highs comes in at $1,291.8. The last time gold was at this level, silver was hovering around $21, and this would put the silver/gold ratio at 61.5. That level represents a perfect fail of the 200-day moving average with gold at a major support level.
In silver, there was also a wedge formation on the chart between the low on August 25 and the high on October 14. Silver had broken out of this wedge to the upside on October 29, and then pulled back and retested the apex at $24 on November 3, forming another convincing major support level.
Trading Gold Options
You may be wondering what to do if gold does not get to $1,325 in the near-term, and instead, consolidates at current levels or again turns higher. Do you miss your opportunity to gain market exposure? No. You can add a strategy of selling premium while you wait for a move to $1,325 and possibly $1,290. If someone asked you today if you would like to be long gold at $1,300 and receive $1,350 to do so, would you say yes to that proposition? If so, you might consider selling a January $1,300 put, which will bring in $1,350 in premium (not including your commission costs). This option expires December 28, 2010.
If the market did fall to $1,290, you would be assigned a long gold position at $1,300. With the premium you have collected, that offsets the cost to $1,287. If the market never drops by expiration, you keep your premium and walk away with no position. Selling options can involve unlimited risk if you are assigned a futures position, so it’s not for everyone. However, if that is your ultimate goal, it can be a viable strategy.
I have dabbled on what my expectations are for gold, where you might consider entering the market, and how. If you would like more detail on this or other markets, please don’t hesitate to give me a call. I’d be happy to discuss a customized trading strategy for your unique goals and risk tolerance.
William Baruch is a Senior Market Strategist with Lind-Waldock. He can be reached at 888-341-2071 or via email at wbaruch@lind-waldock.com.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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