Houston… we have a problem.
Or, more specifically, gold has a problem. A couple of them, actually.
Top of the list is the fact that the Federal Reserve has officially begun to slow its quantitative easing (QE) policy. By $10 billion per month.
With that stimulus gone, plus the fear of inflation also not on the radar in the short term, gold took a hammering in 2013. The price drop was a direct result of investors foreseeing the end of the Fed’s QE.[ad#Google Adsense 336×280-IA]However, gold has kicked off 2014 in a slight uptrend.
So is the metal due for a comeback this year?
Based on the trend and some enlightening discussions I had with some major gold dealers last week, here’s my verdict.
One that could have spectacular results for investors…
And the Next Stop for Gold is…
The most important number in the gold market right now is $1,200.
This is the crucial main support level for the metal – and if you have any doubt about just how important it is for gold to hold $1,200, this chart should put them to rest…
As you can see, gold has bounced off this key level (between $1,150 and $1,200) more than a few times over the past 12 months. Just this past week, gold bounced to $1,254.05 – its highest point since December 12.
Ever since gold dropped from the $1,700 level a year ago – the beginning of the end for QE – support has remained solid around its current price.
Moreover, each time gold has hit the mid $1,100s, it’s bounced higher. This consistent behavior makes $1,200 even more critical to gold’s fate. Why?
Because if gold drops below $1,150 and closes under that level for a few days, the next leg down would take it below $1,000 – and that could spell another round of trouble for gold.
If gold is, indeed, trending downward – and my contacts say it is – it may prove to be a spectacular buying opportunity, particularly given that long-term inflation is still in the cards.
Go With Logic, Not Guesswork
One of the gold dealers I met last week was anything but confident on gold’s prospects.
In fact, he sells to small retail buyers and told me that demand there is really weak. Since his last “good” year in 2012, business has slowed. Average investors who drove gold higher when they feared missing the boat are no longer supporting the sector.
And those who base their decisions on round numbers are also getting burned.
For example, one of my contact’s biggest buyers is notoriously bad at timing the market. He picked up $700,000 of bullion at $1,700… only to see his holdings crash by more than 25% in less than a year.
Investors like this are famous for using round numbers as a reason for both euphoria and panic.
We’ll base our decisions on logic instead.
So what should you buy – and when?
Your Buy Signal
Clearly, gold sentiment is very negative at the moment.
The recent slight uptrend in gold came from Asia – the biggest bullion consumer lately. But nobody wants to buy gold on the retail side in the United States. And dealers are feeling the heat. They’re not only seeing lower sales, they’re being forced to lay off staff as a result, too.
But it would be remiss of me to ignore the contrarian angle here.
Having plummeted in 2013 amid apocalyptic QE fears, gold stocks that lost 50% or more of their value are now showing signs of stabilization. In addition, some major high-cost mines have been written off.
Keep in mind that when the majority of investors lean heavily to one side, the opposite side warrants attention. When there’s blood in the streets, it’s time to buy. Sound familiar?
So the contrarian side is looking for a rebound in gold prices.
Fortunately, we have a technical roadmap that clearly shows gold’s support levels – and where gold is headed if it breaks below $1,200.
If it fails to dip under that $1,200 level in the next few months, it may prove to be one of the better opportunities to buy gold and gold mining shares in a decade.
And “the chase” continues…
Source: Oil & Energy Daily