Perfect Storm Brewing For Gold Price?
London (Dec 5) Summary •The price of gold has dropped $170 / oz since election night.
•We have just seen the most negative 3 week change in open interest on gold since 2008.
•Bullish sentiment on gold is at depressed levels, and nearing a buy signal.
There's absolutely no sugar-coating how ugly the past few weeks in the gold market (NYSEARCA:GLD) have been. A flat day for gold has been a victory for investors, in a month that seemed to get increasingly worse each day. After what looked like a bottom at $1,250 / oz, gold has fallen off a cliff since reaching $1,337 / oz in futures trading on November 8th. Those following me know that I exited my long position on gold at $1,229 / oz on November 11th. I was forced to do this to adhere to my stop level, and because I felt that if $1,250 / oz was broken, more downside would be seen. This resulted in a $24 / oz loss on the trade, from my average cost of $1,253 / oz.
The reason that I always advocate stops is because it allows you to buy an asset class lower, when it is ready to go back up. Some authors recommend simply dollar cost averaging into positions to mitigate your risk. I have nothing against dollar cost averaging in a bull market, but it's not the best move when you're one year into a bear market. While it's impossible to know how long the bear market will last, buying blindly with no stops is a recipe for disaster.
While gold has not turned the corner just yet, some positive developments are showing up. Open interest on the metal is at the lowest levels since February of this year, and the 21-day moving average for bullish sentiment is at the lowest level since July 28th of last year. While this did not lead to a complete bottom in the metals, it did precede a move from $1,080 / oz to $1,170 / oz in less than 20 trading days. There is no guarantee that the current setup will fuel an 8% rally in less than a month, but in the past the indicator has shown strong positive forward returns one month out.
Source: SeekingAlpha
