As I write this on December 20th, gold is trading at $1201.3 an ounce, rebounding slightly from yesterday's -3.88% plunge and close below key support at $1200.
So is now a time to buy?
We're getting mixed messages at these levels for the following reasons:
- The Power Crossover Method gave a sell signal on December 19th, but with Dec 20th's move higher, the signal has not been confirmed (as a rule we give it 3 trading days).
- Round numbers (e.g. 1,200) are very powerful, especially a round number that has held up this year, and was last encountered in 2010.
The last time gold broke the $1200 mark (June 28th, 2013) we saw a reversal and pushed right back to $1300.
In addition to $1200 being a key technical support level, there's also the fundamental case that miners start to lose profitability below $1200 an ounce.
With the price of gold exploding in 2011, land that was once too expensive to mine became attractive. What was once a profitable mine at $1500 could be a losing mine at $1200, and in theory mines closing would mean less supply and increased demand going into 2014.
Although many market participants believe that the key to profitability is $1200 an ounce, this varies from miner to miner. Barrick Gold, the world's largest gold producer, had “all-in sustaining costs” of $919 an ounce during the first nine months of 2013. Some would argue that Barrick Gold's all-in sustaining costs are lower than the norm by making some strategic decisions, like laying off 30% of its office staff in 2013 in order to bring costs down. But as a whole, the average cost to mine gold seems to range between $1,100 to $1,250. More importantly market participants seem to “believe” that $1200 is a key level.
GLD Call Options?
GLD, the SPDR Gold Trust ETF, is currently trading at $115.94 a share. The $112.00 February 2014 call can be purchased for $6.05, or $605. A bounce off of $1200 and move towards the Upper Bollinger Band, could translate into a $6 move in the stock or approximately $420 in profit trading $112 Feb 2014 calls. A strong push lower would result in a loss, but one we can probably keep to a minimum.
As long as $1200 holds and the Power Crossover Method short signal isn't triggered, I think we could get a nice bounce off of this level with good risk to reward, risking approximately $200 to make $400 or more.
However, if we close below $1185.9 (12/19/13 low) and get a Power Crossover sell signal, I am looking to SHORT gold.
Hope this helps. 🙂
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Make sure to check out this week's Rockwell Club Session “How To Trade And Invest in Gold & Silver”. In this session we review strategies for swing trading and day trading gold & silver, in addition to tips for buying physical gold & silver.
GOLD has had a nice bounce since our original blog post. GOLD futures are up $54 (as of the 1/13/14 close), and GLD is up $5.08 a share. We've had the bounce to the Upper Bollinger Band that we were looking for and today the $112 Feb Call options were quoted at $9.30-$9.50. Since our original post the 112 call is up $3.25. Although GOLD could be on its way higher, now would be a time to consider some trade management to ensure that a winning trade doesn't turn into a loser.