DO WE START BUYING GOLD DOWN HERE?
Few weeks on this platform, I described commodities in general as the worst asset class to own (see here) and now I’m talking about buying Gold- What! Am I a Hypocrite for doing so- hell yea! In this investment business, once the data changes, you have to change as well. No need to play macho man with the market!
Please take a second to hear my reasons for thinking about buying Gold at current levels.
SENTIMENT
Sentiment is a powerful tool that leads to momentum in markets. Just when everyone thinks something is going to happen-the opposite happens. Remember when everyone was talking about Oil going to $200 this time last year, the opposite happened-lol!
TowerGlobal proprietary sentiment indicator which I use indicates that there is extreme negative sentiment towards Gold at the moment. Even the media has given up on the metal (check out this CNBC ARTICLE on Gold)
You can’t make it up- these are the kind of things that happen just as a market is about to rally.
Are we just going to jump in and buy based on sentiment- hell no! There are other factors.
PRICE ACTION
Despite over the negative sentiment and news on Gold, for the last week you would think Gold has been falling hard right- wrong! It has been consolidating in a triangle as shown in the figure below
(Daily chart Gold prices courtesy of TowerGlobal)
After consolidations, come big moves- so(which is around the $1100), a rally to the upside is in the cards!
MOMENTUM
A picture is worth a thousand words so look at the picture below
(Daily chart Gold prices courtesy of TowerGlobal)
Notice what has been happening in the momentum indicator (blue line)over the last few weeks- it has gradually put in higher lows and higher highs while prices were consolidating- its telling us that the downward momentum is gradually dying and some big buyers might be taking up Gold at current prices.
SEASONALITY
I like to look at the seasonality of financial instruments to see if there are discernible patterns that occur over certain months of the year. Are there seasonal patterns in Gold? Yes.
Over the last 30 years, August, September and November have been the best months for Gold (credit to TowerGlobal for pointing this out to me). We are currently in August. If Gold is going to rally, it might as well be now.
RISK
So we have Price action, sentiment, momentum and seasonality going for us in this trade. However, the most important factor for me is risk management- what is the risk: reward opportunity of this idea.
Let’s look again at the Daily chart of Gold again
(Daily chart Gold prices with the 200 Day Moving Average)
As stated above, we only want to own Gold above $1100. If after hitting $1100, Gold prices fall again to $1082, we will take our loss and throw this whole article/ investment idea into the garbage.
Our target is the $1190 level indicated by the 200 Day moving average. This gives us a risk: reward ratio of 1:4. – I’ll take that every day and every night!
I think this trade idea should last about 1-2 months. So if you are a long term investor (3 months and above), this probably isn’t a good idea for you.
Good luck trading!
Sentiment does seem to be shifting towards a bullish Gold. See my thoughts here:
https://mytrustfunddreams.wordpress.com/2015/08/11/flight-from-paper-currencies-to-gold-my-conspiracy-theory/