GOLD: holding pattern

Disclosure: I am long UGLD.  From: Epsilon. Seeking Alpha.

With the speculation surrounding gold recently, many investors are wondering whether to buy, sell, or hold. As with all investments, the answer grossly depends on your time frame.

First let’s take a look at where gold is currently, via one-year and two-year time frames:

(click to enlarge) (click to enlarge)

A number of factors, including a strengthening U.S. dollar, a stabilizing world economy, and the absence of Chinese gold demand during its Lunar New Year holiday last week have driven gold to a six month low, closing just above $1,600.00 last Friday.

This recent sell-off can also be partially attributed to the market’s reaction to institutional investors George Soros, Julian Robertson, and Allianz’s Pimco reducing their stake in SPDR Gold Trust (GLD) in the fourth quarter of 2012. (More info can be found here.)

Naturally, the culmination of all of these factors has left gold investors feeling a bit unsettled.

But that’s why I love gold investing. Unlike stocks, whose volatility can increase unnaturally with the slightest earnings miss, lawsuit, CEO replacement, et cetera, the ebbs and flows of the precious metals markets are generally natural and often times even predictable.

So looking at where gold is currently and where it has been in the past couple of years, here’s my outlook:

Gold is currently in what others have deemed a “holding pattern”, trading in a sideways pattern between the $1,600.00 and $1,700.00 price levels. This is most easily seen by the gold futures graph below:

(For clearer illustration, further graphs in this article will use gold futures in lieu of the gold spot price. Please be aware of the differences between spot and futures price, as explained here.)

(click to enlarge)

This holding pattern could certainly extend further downward toward $1,550.00 or even as low as $1,525.00, where the metal has previously established strong support. With this support around the $1,525.00 to $1,550.00 levels, I believe gold is a strong buy for both short and long-term investors within the $1,525.00 to $1,600.00 range.

Similarly, within the range of $1,600.00 to $1,625.00 I feel that the metal is a buy for both short and long-term investors.

Once gold reaches back up toward the upper, $1,700.00 level of this holding pattern, this could be a good place for short-term investors to sell and/or place a trailing stop order. For long-term investors, I recommend a hold at the $1,700.00 level with a further profit target or strategy reevaluation at the $1,800.00 price level, where the metal found resistance in both February and October, 2012.

The next area of resistance will likely be seen at the $1,850.00 to $1,875.00 price level, where gold found strong resistance in August, 2011. Naturally, this could be a very good place to sell or place a trailing stop.

Using gold futures, below is a graphical interpretation of the above recommendations:

(click to enlarge)

It is also worth noting that some gold fund managers, including Nick Barisheff of Canada’s Bullion Management Group, see gold reaching to new highs near $2,000.00 in 2013. If we see the metal break above the $1,850.00 to $1,875.00 resistance level this could signal a break out and a quick, subsequent move toward $2,000.00 or above.

Confident in the above-mentioned support levels, I purchased VelocityShares 3x Long Gold ETN (UGLD) during gold’s recent downturn. Anticipating that gold will rebound off of said support, my profit target correlates to the $1,675.00 to $1,700.00 gold price range mentioned above, where I will place a trailing stop on my UGLD position.

As decay risks are a significant concern with leveraged ETFs, I plan to hold this ETF as a short-term position only, regardless of my profit target.

In addition to UGLD, the following ETFs can also be used to trade gold, on both the long and short side of the trade. A full list of related ETFs can be found here.

(Please be aware of risks associated with leveraged and inverse ETFs before investing. An explanation of these risks can be found here.)

Symbol Long/Short Leverage Fund Name
GLD Long 1X SPDR Gold Trust
DGP Long 2X PowerShares DB Gold Double Long ETN
DZZ Short 2X PowerShares DB Gold Double Short ETN
UGLD Long 3X VelocityShares 3X Long Gold ETN
DGLD Short 3X VelocityShares 3X Inverse Gold ETN
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