Time to Short Gold? Not So Fast!

09/30/2010 12:01 am EST


By Jordi Perez of MarketSpaceTrading.com

Gold has hit record highs nearly every day for the past ten days and has now breached $1300 per ounce. I figured this was going to happen sooner or later, so I held off on anything talking about gold hitting record highs for a few days.

Sure enough, it surpassed the $1300/oz level the day after futures expiry, so that there would not be any physical delivery per the contract terms. This is typical in the commodities markets since the contract purchaser is usually just a speculator who wants nothing to do with a few tons of gold or a thousand bushels of wheat. Conversely, the contract writer does not want to be forced to sell physical inventory at a lower-than-market price when they could simply pocket the contract premium.

I trade gold using the SPDR Gold Trust ETF (GLD), which for all intents and purposes, does the job very well. GLD closed at a record high of $127.85 at Tuesday’s close.

Time to Short Gold?

Now it seems that shorting gold is all the rage and I have seen several articles from the likes of The Wall Street Journal and CNBC about this. This seems to be some sort of hail Mary pass because if gold does indeed drop, they will claim credit as being gurus, and if it doesn’t, they are not accountable

From my perspective, gold is innocent until proven guilty. I’ve already made my recommendations to go long gold (via GLD) a couple of months ago, and now I think this will be a stop-raising game for awhile. In other words, gold will have to close below some key levels before even considering an exit of my long positions, let alone going short. Now for some key levels:

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The chart above shows the big run gold has had over the past couple of months. There are a couple of things that cause me to be cautious, including:

  1. How big and relatively uninterrupted this run has been
  2. MACD momentum is not as high as it was last time it made new highs—possible divergence

NEXT: Key Levels to Watch on GLD


The first level that I am watching for is $125.60, marked by the red line. This is the daily volatility stop, meaning price has not been moving fast enough on a day-to-day basis for this level to be breached without raising any red flags. Generally, daily volatility stops are good levels to place (guess what?) stops.

Second level I am watching out for is the $123.50 area, which should be pretty good support considering how much resistance it provided before.

At this point, I will continue to ride the trend until I am stopped out, raising stops along the way. Stepping in front of the gold train by going short sounds about as fun as cutting my fingernails with a hammer. The Fed’s money printing is what is ultimately pushing the nominal price of gold up. The dollar has been dropping like a rock, and while it looks like it may encounter some short-term support, I think we may well test the 2009 lows.

The PowerShares Ultra DB US Dollar Index Bullish ETF (UUP) tracks the US dollar index x2. We can see that it is in a strong downtrend. The blue and green lines are support levels, but the only strong support I see is the bottom line near $22. This was the 2009 low and I expect it to be tested. The top green line is only likely to cause a small bounce, but we’ll see what happens when we get there.

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A sinking dollar is good for commodities and equities. It has inflated asset prices around the world and may even be partly responsible for the higher highs seen in equities recently.

Fed Money Printing

There is speculation that the Fed will add another $500 billion to its balance sheet. While this would not be terribly surprising considering their reputation, any news that shows a smaller-than-expected cash injection would raise a red flag on the long gold/short dollar trade to me in the short term.

The long-term trend for gold is still the same as it has been for the past decade or so, and I’ll think about shorting gold at $2000 an ounce. Maybe…

By Jordi Perez of MarketSpaceTrading.com

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