The last four years have not been good for gold investors, as the price for the metal has fallen from a high of $1923.70 per ounce to a recent low of $1,080 per ounce. Strength in the U.S. dollar has contributed to the fall for the past year, but that was not the case in 2013.
Given the multiple sovereign debt issues playing out around the globe (Greece and Puerto Rico most prominently), it is hard to believe that gold has continued to fall. Normally investors run to gold during times of financial uncertainty, but that hasn’t been the case in recent months.
With the price of gold falling so sharply, the SPDR Gold Trust (NYSEArca: GLD) has seen several items appear in its charts. On the daily chart, we see that the 10-day RSI recently went down to 10. That is the most oversold reading for the gold ETF since its launch in November 2004. You can also see that the slow stochastic readings are in oversold territory and recently made a bullish crossover.
When we turn our attention to the weekly chart, we see a downward sloped trend channel that has dictated trading for the last couple of years, and that the GLD fund is approaching the bottom rail of the channel currently. I don’t normally like buying stocks that are in a downward sloped channel, even if they are getting ready to hit the bottom rail. We also see that the weekly oscillators are both in oversold territory, just like we saw on the daily chart.
Looking at the monthly chart we can see that the $100 level has entered the picture, and it could serve as support for the GLD. After the GLD launched in late 2004, the first resistance level it faced was the $100 level in March 2008.
The same level acted as resistance again in February 2009, but the fund broke through the resistance in September of that same year and it never looked back. It never looked back until now, that is.
We also see on the monthly chart that the 10-month RSI has only been in oversold territory one time in the history of the GLD, but the indicator is getting very close to hitting it again. The monthly stochastic readings are already in oversold territory.
One of my favorite sentiment indicators for commodities are the Commitment of Traders reports. The COT report for gold for this past week showed that large speculators have shifted dramatically in recent months. The group has a net long position of 47,824 contracts.
Large speculators have not held a net short position on gold at any point in the last 10 years. There have only been a handful of weeks where the net long position was under 50,000 contracts, with the latest one taking place in the last week of 2013.
So how do you play the GLD right now? Like I said earlier, normally I don’t like to buy stocks or ETFs that are in a downward sloped channel, even if they are hitting the lower rail. However, given the limited amount of bullish sentiment, the oversold readings on all three charts and the support at the $100 level, I would look to buy the GLD fund.
I think gold rallies in the coming months and that should be good for at least a 15%-20% gain. If the sentiment remains skewed, it could rally even further. I also think if the price breaks hard below $100, you should get out. I would suggest a stop-loss in the $97 range.
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