Betting on Lower Gold Prices

02/14/2011 10:30 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

The Spyder Gold Trust (GLD) challenged the 50% retracement resistance last Wednesday but has been unable to move much higher. A majority of investors are still long gold, and while the major trend is positive, I am still expecting lower prices over the next month or so. This is the week that gold could turn lower. So is there a good way to bet on lower gold prices?

chart
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Chart Analysis: The weekly chart of GLD shows that it has closed higher for the past two weeks. Rallies against the trend often only last for two bars.

  • The key 61.8% resistance is at $135.05, which still could be tested before the rally reverses

  • A drop below key short-term support at $131.25 will indicate the rebound is over

  • Further chart support is at $129.25 with initial Fibonacci support at $125.40 - $126.40

  • The weekly on-balance volume (OBV) formed a negative divergence at the recent highs and has broken its uptrend. It rebounded, but it is still below its declining weighted moving average (WMA). This is consistent with a failing rally

  • The monthly OBV confirmed the recent highs, so the major trend is positive

The Powershares DB Gold Double Short ETN (DZZ) is a bet against lower gold prices that may not be appropriate for all investors due to its risk. (See the Powershares Web site here). Technically, DZZ appears to be completing a bottom formation but needs to move through key resistance at $9.30 to confirm that the lows are in place.

  • From the December lows at $7.88, DZZ rallied to a high of $9.26

  • The 50% support level of this rally is now being tested with the 61.8% support at $8.40

  • There is further support at the gap between $8.08 and $8.26

  • The daily OBV surged in early January and is acting much stronger than prices, which is consistent with a bottom formation

  • Volume has contracted on the pullback

  • The 38.2% resistance from the July highs is at $9.23 with the 50% resistance at $10.07

What It Means:As I mentioned last week, this still looks like a rally within the downtrend for gold futures, GLD, and the Market Vectors Gold Miners ETF (GDX). Therefore, all three should drop below the lows made at the end of January. From my in-depth article on the correction (see Gold and Silver: How Low Will They Go), I still have a first downside target for GLD at $125.40 - $126.40 and then the $123.20 - $121 area, as represented by the green box on the above chart.

How to Profit: Before the rebound in gold is completed, we may see a brief drop and then one more rally above the recent highs, but a lower close is likely this week. Previously, I recommended hedging long positions in GLD by selling the March 130 calls against long holdings in the ETF. These were established at around $4.15 and they closed on Friday at $3.75. This is still the favored strategy if you have a long position in GLD.

An alternative way to offset a potential loss in your long gold position or take a speculative trade is to buy DZZ at $8.56 or better with a stop at $8.11. The first target is in the $10 area. Remember that these ETNs are very speculative and are meant to be held only for the short term.

The iShares Silver Trust (SLV) exceeded all Fibonacci retracement levels, but if my view on gold is correct, the rally in SLV should also fail, but I have no position or recommendation on SLV for now.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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