Gold is currently looking somewhat dull on the chart, losing some of its luster following the bearish move of the spot price to below $1,600/ounce on February 15. Gold has since rallied back to above $1,600, but it continues to show extremely weak relative strength.
We are hearing more whispers predicting prices could falter more; but while I’m neutral at this point, the ability of the yellow metal to bounce back from below $1,600 was a positive sign.
The jury is still out on the potential of gold. The situation in the eurozone remains fragile, but there have been some signs of improving sentiment, which is what traders want to see.
In early January, Marc Faber, also known as “Dr. Doom,” in an interview on CNBC suggested gold could correct 10% or more to as low as $1,550 and $1,600. (Source: Belvedere, M.J., “‘Dr. Doom’ Faber Sees Possible 10% Gold Correction,” CNBC, January 8, 2012, last accessed February 20, 2013.)
In my view, gold continues to be a place to park some capital. For this reason, I feel the metal will likely continue to hold above $1,500 after 11 consecutive up years.
For the investor, accumulating gold stocks or positions on further weakness below $1,600 makes sense.
The chart below shows sideways trading with major support around $1,550 and upper resistance at $1,800, as indicated by the horizontal blue lines. Within this trading band, there’s a downward trading channel as indicated by the downward-sloping blue lines. We saw a similar situation in February to May 2012, prior to a rally back to the upper-band resistance. I’m not saying this will happen again, but the recent trading action suggests this. Hence, if gold falters back to around $1,550, there may be an opportunity to buy gold, based on my technical analysis.
Chart courtesy of http://www.StockCharts.com
I continue to favor gold going forward, given the continued financial distress and recession in the eurozone and Europe. There’s also the ongoing tension in the Middle East.
Moreover, China and India continue to be the world’s top buyers of the yellow metal, and this is expected to continue. The Chinese have also been buying mining companies around the world in an effort to increase its reserves. This is a reason why I like some of the smaller mining companies, especially those with a massive reserve of proven metals in the ground, waiting to be developed and needing a cash-rich partner to get the ore out of the ground.
So while the near-term prospects look somewhat dull for gold, I look at downside moves as an opportunity to add to existing or new positions, especially some of the smaller mining stocks.
Thursday, February 21st, 2013
By George Leong, B.Comm. for Profit Confidential