New Trade Recommendation: Buy the February gold at $820 or better
Fundamental Landscape
Despite a recent pullback, we maintain a bullish overtone for the precious metals markets this year and particularly for gold. We expect to see significant rallies later this year with support coming from safe-haven buying as well as inflation. We saw an end-of-the-year rally in the gold market, as prices rose about $60 an ounce from a low of $830 to a high of $892. The past week was the first real trading week of this new year, and we saw the price of gold decline about $40 from the year-end highs to $850, and a further drop on Monday, January 12, 2009. The market had been on a streak of five gaining weeks prior. Although last week’s sell-off occurred despite weak economic news, we see this recent divergence of market correlation as largely due to index fund rebalancing, rather than a decoupling of market trends.
Index fund rebalancing is a normal course of business at this time of year, and given the large volatility we had in 2008, a significant adjustment of market weights seems prudent. However, we expect that the main fundamental drivers for gold, safe-haven buying and inflation-hedge buying, to still be driving the trade. On Friday, the U.S. Labor Department released its monthly employment numbers, indicating that the unemployment rate had increased from 6.7% to 7.2% in December. While the U.S. Labor Department had also revised previous unemployment numbers suggesting that the unemployment situation had been less severe than previously reported, it seems clear that both the U.S. and the world economy is still contracting.
The gold market is vulnerable to small pullbacks, and we feel that these price corrections (like the one we saw January 12) are buying opportunities. February gold fell $34 to $821 on January 12, after hitting an intraday low of $817.10.
While index funds have sold some of their precious metals positions to adjust their exposure, the large net position of funds indicates that that they are still quite bullish on the gold market. As of January 6, 2009, the Commodity Futures Trading Commission’s Commitment of Traders report reveals a net position for funds in both futures and options of 144,751, an increase from the prior week of about 6,456. It seems that the trade has been bidding up gold in anticipation of inflation. The Federal Reserve’s policy of quantitative easing has also put inflation fears quietly into the back of traders’ minds. Inflation has not yet prevalent in the economy, as banks are reluctant to lend money and consumers are hesitant to spend, but we think the landscape for significant inflation and higher prices has been set.
Technical Landscape
February gold has been in a sideways to up trend since the middle of December 2008, when it had rallied from the previous low of $688 in late October 2008. February gold peaked on its latest rally to a high of $892.
The daily chart of February gold depicts the market failing to reach the upside objective of about $940 on that rally, but had been holding above the 62 percent retracement level at about $843, up until the sharp decline on January 12. This price action combined with the formation of a wedge pattern over the last week and a half suggests a technical retracement that stopped near minor support at $820. We believe that that this consolidation presents a buying opportunity, as it represents a minor correction within an overall upward drifting trend.
We recommend traders should look to buy February gold at $820, and risk a close below $812. Our initial upside targets would be first minor resistance at $890, within a longer-term upside objective of $940.
Dennis Cajigas is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. Dan Faretta is a Market Strategist with Lind Plus. They can be reached at 866-631-6216. Dennis can be reached via email at dcajigas@lind-waldock.com and Dan can be reached at dfaretta@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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