Gold is the type of market that garners a lot of press, and, accordingly, is susceptible to emotional band wagon trading. The price of gold is often volatile and is known for relentless directional trade as the "herd" shifts from one sentiment to another.
In the current environment, the media and traders alike, have gone from being irrationally bullish to what might be overly bearish in the short-term. Being contrarians at heart, we can't help but view this as a potential counter-trend opportunity for the gold bulls.
Seasonal tendencies offer a compelling argument for being a gold bull in the coming weeks. According to the Commodity Trader's Almanac, in the previous five occasions gold prices have expressed a strong propensity to rally throughout the month of February. When considering stats over the previous 25 years, gold prices have been overall mixed but with a stable bias.
Gold bugs, retail traders and fund managers flocked into gold on the heels of uncertainty throughout the recession but have spent much of the last six months working their way out of positions in lieu of what appears to be a more stable economic landscape.
Since the peak of gold prices in October, large speculative traders have offset approximately 35% of their holdings. We suspect this trend will resume in the short term but believe traders will soon shift focus to inflation concerns and this should put a floor under pricing.
In our opinion, because gold is such an emotional market, trading it on fundamentals is a difficult game. However, we believe the chart can provide insight into pricing. We see a well-defined down trend channel that spans from the October peak. In our view, the odds favor a test of the bottom of the channel near $1,585.
Coincidently, gold prices found significant technical support in the summer of 2012 at a nearby level, $1,578. It seems likely that the bears will shoot for these prices, and perhaps even run long standing stop orders below (as bulls "puke" their long gold holdings.) Accordingly, if you are looking to buy into the dip the "nibble" level could be near $1,590 with the mid $1,570s a possible area to get a little more aggressive.