Gold Heading Higher, Market Heading Lower?

Is it just me, or is it difficult for everyone to share almost two bottles of wine with your wife, and then still get up at 6:00 am the next morning to write your weekly commentary? At the JDH household Friday night is pizza night. Mrs. JDH makes the pizza. We have a bread maker, so she makes the dough, and then rolls it out on a pizza stone, and then we cook it on the barbecue. My two boys get to eat dinner in front of the big TV in the basement. My wife and I eat our pizza upstairs, with a nice bottle of wine. As we were eating my wife went off on a rant about the stupidity of Earth Hour, so we had polished off a bottle of wine before the pizza was done. Not wanting to interrupt her rant, I opened a second bottle. (Having a basement wine cellar greatly assists in this process, and I heartily recommend it). All went great last night, but it’s tough the next morning. Perhaps I should start a new category on the Buy High Sell Higher Forum for each of you to give me tips on how to drink copious amounts of wine, and still fulfill your duties as an amateur blog writer.

But I digress.

I will summon my strength and focus long enough to discuss our favorite yellow metal: gold. There was much talk in the news this week about the apparent fact that gold gets slammed just before options expiration. There was an article on the GATA site (which I tweeted about, so if you want clips of my brilliance in between weekly commentaries, follow my feed on Twitter, or just watch it on the right side panel on this site) this week, which follows many other articles written over the last year or so, like this one. Here’s the chart (click on it to enlarge):

I have attempted to draw, with blue hours, the futures contract expiration dates. I may not have the date precisely correct (see note above about copious consumption of wine), but you get the general idea: to prevent long call option holders from cashing in, the price gets hammered just before expiration, to prevent long gold holders from generating profits.

I also put in some resistance lines. It looks to me like $1,060 is strong support. If we break that, look out below. The challenge is to break through the red resistance lines at around $1,140, $1,160, and $1,220.

We all know that gold is headed much higher; the only question is “when”? Presumably the gold suppression schemes could last for some time to come, but it is also possible that golds ten year rise will continue. Gold has not come even close to testing the 200 day moving average, and even the 50 day moving average has offered reasonable support.

As we sit today, gold is at $1,107, just a hair above the 50 day moving average of $1,106. Even better, the RSI is at 49, and whenever we cross over the 50 level to upside good things happen.

To sum up: options expiration has passed for another month, we appear to be at a good support level so downside risk is minimized, and the RSI is at a great level for an upward push. So, I conclude that gold will do well over the next period of time. So, this week, I took the opportunity to average down my costs, and I bought more gold shares. Here’s what I bought this week (on Wednesday and Thursday, at the low points on the week):

• AEM.TO – Agnico-Eagle Mines Ltd. (gold blue chip)
• ADM.V – Andina Minerals Inc. (speculative junior gold)
• CEF.A.TO – Central Fund of Canada (blue chip gold fund)
• K.TO – Kinross Gold Corp. (gold blue chip)
• G.TO – Goldcorp Inc.(gold blue chip)
• PAA.TO – Pan American Silver Corp. (silver blue chip)
• SLW.TO – Silver Wheaton Corp. (silver blue chip, but with more upside)

If I’m correct and we have a bounce this week, I will follow my typical strategy and do some covered writing on these stocks to lock in my profits, and to get some downside protection. I am now only holding 27% cash, my smallest cash position in two years, so let’s hope I’m correct.

One stock I didn’t average down on this week was BBR.TO – Brett Resources Inc. a speculative junior gold that is doing great. It’s my first big winner of the year, and I’m up close to a double on it. I think the run has just begun, so I’m holding.

My new purchase for the week was CMK.TO – Cline Mining Corporation. I believe the story is compelling, so I have started accumulating a position. It’s had a great run already this year, so I will wait for a pullback to increase my position. I posted my full thoughts yesterday, and you can read my thoughts on Cline Mining Corporation here.

And the market in general?

I’m no technical analyst, so I’m flying blind here, but if the top was around 1,561, and the bottom was around 683, then the Fibonacci retracement level of 61.8% would be somewhere in the 1,225 to 1,230 level. We are sitting at 1,166 now, so this upside bounce could have another 59 points to go, or around 5%. That will be a level I’ll be watching very carefully, because if it doesn’t hold, down we go.

(Of course we blew through all of the other Fibonacci retracement levels at 50%, 38.2%, and 23.6%, so this could all be just more mumbo jumbo. Time will tell).

If you want my guess, I don’t see how the market can go much higher from here. The 1,230 level was around where we were when Lehman Brothers collapsed, and back then the economy looked much better. Unemployment was just over 6% (it’s just under 10% now), the deficit was a mere $500 billion (it’s more like $1.5 trillion now), and even auto sales, which have picked up to an annual level of 10.3 million now, were still up in the 12.5 million range. The economy may appear to be recovering (due in large part to government stimulus), but we are still not back to where the economy was at these market levels, so I suspect while this bounce may last for a few more weeks, that will probably be it.

If I’m in a gambling mood I may grab some short term S&P call options, but only with play money. The shorts can start as we approach the 1,225 to 1,230 level.

Those are my thoughts; feel free to post comments; see you next week.

Tagged as: Fibonacci retracement, Gold