I got a flashback to this episode this week when Jason McGregor emailed me to query my stance on gold. He'd previously heard a webcast of mine last year where I'd said that gold was going up to well over $2,000 an ounce. And yet, here I was in my daily Commodity Outlook piece recommending short positions with a target-price of below $1,600. While conceding that my view was right, he wanted to know when I'd ceased to be a gold bull.
My answer is simple: I haven't. I remain very positive on the outlook for the price of gold. The fundamental case for gold is impeccable, as I see it. The proliferation of paper money is set to continue in the coming years, and its effects are becoming increasingly clear. I find it somewhat ironic that the precious metals are doing so badly against a backdrop of rising inflation, albeit still low, and talk of yet more quantitative easing in the UK and elsewhere.
Gold's long-term uptrend
From a technical perspective, the long-term trend in gold is still upwards too. Look at the monthly chart and you’ll see what I mean. While the price is well below its peak of September 2011 at $1,925, the action of the last 18 months is basically little more than sideways action after a strong rise. And it suffered much bigger dips in 1974-76 and 2008, without it marking the end of the bull market.
Given all of this, my natural instinct when it comes to gold and silver is to be a buyer. For the purposes of short-term trading, though, one has to suppress natural instincts. It’s a case of head over heart. I am endlessly surprised at those who make leveraged bets against a strong trend because they see it all ending in tears. Usually, their logic sounds entirely correct, but their timing is hopelessly random.
Swing-chart sell-signal
Gold gave a sell-signal on its swing-chart on Monday 11 February, and silver followed suit the next day. The yellow metal has now given seven such signals since its September 2011 record peak, of which five have clearly been profitable. I do not always follow the swing-charts' messages slavishly, but on this occasion I feel they are spot on. From a day-to-day perspective, I would only be thinking of shorting under these conditions.
Gold's major support
Shorting level for gold
How much further might the sell-off continue? The key level to watch in gold is $1,525. The price has found a floor here on no less than three occasions since September 2011 and then gone on to bounce by 16 to 18 per cent all three times. That said, I don’t think it would be terminal even if the price went through this level. I dare say my longer-term view would remain bullish even on a drop to below $1400. For now, though, I would seek to short the end of rallies. A repeat sell-signal or a failure around the 55-day exponential average would do nicely.
