Bullish on Gold

 | Dec 30, 2011 | 4:00 PM EST  | Comments
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Over the past few weeks, I have been increasingly interested in the long side of gold for several reasons, not the least of which is well-known investor Dennis Gartman's proclamation that he's no longer "bullish of gold" (whatever that means). Neither am I, but I am bullish on gold.

Some events got me interested in the yellow metal Wednesday. Notably, the collapse in February gold to new multi-month lows as it threatened to return to its Sept. 26 low at the $1535 level. And there was the continued slide in the euro to new 11-month lows, below the 1.30 level. That was a plus because, as you know, when the greenback moves higher, as it has been, everything denominated in dollars gets whacked -- and that's what's been happening to gold. So, what if the euro pops back above 1.30 and the greenback takes a hit? I'll tell you what: Gold will pop, too.

Then there's the issue of the non-confirmations at the lows, but more on that later. First, look at the gold chart below to see why I find it so compelling.

Note the low in late September at the $1535 level. A break below that could have opened the floodgates, but it didn't. The low in overnight trading Wednesday was not quite $13 lower, at the $1522.40 level. Just a minor undercut of that low and from there, February gold has already popped by $60. There are still plenty of overhead gaps for February gold to fill, beginning with Tuesday's gap at $1608.60. That gap is difficult to see on the chart because of the three-day holiday weekend, but that level might be a near-term upside objective.

Though I am not long any futures contract, I did recommend buying February gold at the $1540 level for futures trades.

 

February Gold: Bouncing off the September lows.
Source: optionsXpress

 

Also encouraging were the non-confirmations in the gold shares and various exchange-traded funds. The chart below is of the SPDR Gold Shares (GLD), essentially a derivative of gold futures rather than a composite of mining companies, like the  Philadelphia Gold and Silver Index (XAU). This ETF closely tracks the commodity. In other words, if February gold is taking a hit, you can expect the same on the GLD. Thursday was a good example, as the GLD sold off to a new six-month low in early trading.

It's noteworthy that the low of $148.27 was well below the lows of Sept. 26 and Oct. 4. It's also noteworthy that the out-of-the-money February puts that I have been holding short for a few weeks didn't come close to their recent highs. I am still short the February $130 puts, and Thursday wrote the $132 puts on the opening at $0.88 (already cut in half from Thursday morning, trading at $0.45).

 

GLD: In stocks, it's the closest you get to the real thing.
Source: optionsXpress

 

What was especially encouraging yesterday as February gold and the GLD broke below their September and October lows was that the XAU held above its October lows, which marked the lows for the year. Of course, the main reason the XAU held above that low was that the XAU is, after all, made up of a bunch of stocks, and on Oct. 4 all stocks were hammered. It didn't matter if the company was in the business of computers, drugs or, in this case, mining gold. So as gold collapsed Thursday to new six-month lows, the XAU held above its recent October lows. It was partly for this reason that, at Wednesday's close, I re-established modest positions in the Precious Metals Fund at Rydex for the first time since the October lows. So far, so good, as the fund was higher yesterday by 2%, despite the modestly lower close in gold. Remember that these funds are comprised of stocks, so they track the stock market to a considerable degree, and track the XAU closely. Of course, the XAU was also up Thursday, by 1.76%.

There are many possible upside targets, beginning with the gap from earlier this week at the 185 level. That's probably a minimum expectation for a bounce, and I will likely hold positions until that gap is probed, if not completely filled.

 

Philadelphia Gold and Silver Index (XAU)
Source: optionsXpress

 

Color me bullish on gold, and I'm betting on the bounce. I'm moderately bullish on stocks into early January -- though currently I'm just a holder of stocks, not a buyer at current levels.

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