This commodity trading newsletter was distributed to DeCarley brokerage clients on February 10, 2016.
Gold on the Verge of Break-out or Bust!
We’ve been discussing the lack of investor interest in gold since the 2013 swoon. In the meantime, gold has failed to gain material footing, but has also managed to hold trend-line support. Nevertheless, the lack of direction has caused most speculators to move money into other arenas. In fact, near the late 2015 lows the long interest in gold by large speculators was at the lowest level seen since 2002! You might recall gold prices were hovering between $300 and $400 per ounce at the time. In our opinion, this suggests the bulls have plenty of buying power should a sustainable rally emerge.
We’ve been tracking a very tidy trading channel in gold; without fail prices have always managed to reverse precisely where the chart suggest they should. Naturally, this type of pattern cannot continue indefinitely. Eventually, prices will break out of the trading range on its way to repricing; we believe the ensuing break-out of the trading range will be upward.
Because we ultimately believe gold will shine again, we are not fans of getting bearish gold despite the fact the chart suggests that is the most logical course of action at this juncture. Given the recent weakness in the dollar in combination with likely changes in outlook by global central bankers in response to financial market turmoil, we have to side with the premise of a flight to quality bid into precious metals. Additionally, many of the speculators that have spent the previous years liquidating their gold holdings, might be willing to dip their toe back into the market. If so, it should give a lift to gold.
I’ve already mentioned not being a fan of getting bearish that the current level due to a fundamental belief that gold bulls will eventually resurface, but I must also disclose establishing bullish trades after a $150 rally is a dangerous proposition.
Technical oscillators based on a daily chart are at extreme levels, but even a weekly chart which requires a more dramatic incline to move the needle, are suggesting the rally is a bit overheated. For example, the Williams %R reading on a weekly gold chart is trading above 90; any reading in excess of 80 is considered overbought, and with a maximum value of 100 it can be inferred the size and pace of this rally might have surpassed logic. Further, the RSI (Relative Strength Index) on a weekly chart is in the mid-60s. A reading of 70 on a weekly chart is considered “off the charts” in regard to extremes and is a rather rare manifestation. Accordingly, even if prices will eventually make their way higher, as we suspect, gold could easily retrace $50 to $60 before the rally resumes. Thus, anybody interested in playing the upside should either wait for a pullback, or at least utilize a strategy with mitigated exposure. In conclusion, it is probably too late to get aggressively bullish gold from these prices….wait for the next bus.
**There is substantial risk of loss in trading futures and options.**
These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.