Gold has been mired in a downtrend since the fall of 2012. During this downtrend, the precious metal has dropped from just below $1,800 to a low just below $1,180. That is a 34% decline from the top to the bottom and it did so in less than nine months. Since that low last June, the highest price gold has reached was $1,434, and after it reached that high last August the price fell back down to the $1,180 range.
The market gurus think that gold is heading below $1,000. Here’s why they’re all wrong.
Looking at the chart below, we see two things that suggest the bearish pundits are making a mistake. The first thing is the support created by the two trips down to the $1,180 area. The support level is simply the price level which, historically, a stock has had difficulty falling below. The second item of note is the oversold level reached on the weekly stochastic readings. The last couple of times the readings were this low, the price bounced over the next two to three months.
There is more to my bullish opinion about gold than what we see on the chart, too. The market sentiment toward gold has been on the decline for several months now. The Commitment of Traders (COT) report is released by the Commodity Futures Trading commission every Friday and it shows the net holdings of three different categories: large speculators, commercial hedgers and small speculators.
Because of their ability to move a market by sheer numbers, the large speculator crowd is the one that I give the most attention. As of last Friday’s COT report, the large speculator group was net long 73,391 contracts and that is the lowest level of long contracts since mid-February. As of mid-March, the large speculator group was net long approximately 138,000 contracts. Doing the math, that is a 40% decline in the number of bullish positions.
Media Bears Gang Up on Gold
In addition to the COT report, there is another form of sentiment that is showing bearishness towards gold and that is the media. There have been numerous articles about gold lately and most of that rhetoric has been on the negative side. While the COT report is a direct reflection on how speculators are investing, the media articles are also a form of sentiment. And like most forms of sentiment, when the consensus of opinions leans heavily to one side, it is usually a good sign to take a position on the other side. In this case , a bullish position in gold is the way to go. It looks to me like there is limited downside risk with the support at $1,180 and there is a lot more upside potential over the short term.
There are a number of ways to play a bullish run in gold, but I think the easiest way is with a gold ETF (exchange-traded fund). There are two funds that see a lot of trading volume and they both track gold almost perfectly. One is the SPDR Gold Trust (GLD) and the other is the iShares Gold Trust (IAU). I prefer the IAU simply because it is priced just over $12 right now, whereas the GLD is price just below $120. The lower price gives you more versatility when it comes to selling part of the position to take profits or if you want to sell covered calls to collect premiums. Writing a covered call option means you sell your right to trade a stock, in exchange for cash paid today.
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