A Critical Test Of Support For Gold

Summary

Gold and gold ETF now testing critical near-term benchmark price.

Failure to hold above this level would break the immediate-term trend.

Fear factor still high, so don't give up on the metal yet.

Spot gold closed lower on Wednesday after its biggest daily slide in 10 weeks the previous day. Gold struggled to rise in the face of a higher U.S. dollar index and ignored weakness in U.S. equities for a second straight day. Spot gold shed 0.40% for the day and closed at $1,324. April gold futures, however, settled slightly higher at $1,332.

The April gold futures chart shown here provides some context for the ongoing tug-of-war between buyers and sellers since late January. While the bulls have managed to keep the gold price above the nearest pivotal support at the $1,314 level (the Feb. 7 closing low) this week’s failure for gold to extend the previous week’s rally and overcome the $1,368 level (the Jan. 25 closing high) is a concern. Gold’s immediate term is still intact but the bulls need to make another charge soon, else the bears are likely to regain control of the immediate-term (1-4 week) trend.

Source: www.Barchart.com

As we reviewed in the previous commentary, gold’s Five Supporting Factors (which includes silver, oil, and the dollar) aren’t as strong as they should ideally be to confirm a technically driven rally. Gold’s fear factor, however, is still present and could conceivably overcome the lack of immediate-term technical support from silver and oil prices (inflation-sensitive barometers). The CBOE Volatility Index (VIX) is currently above its one-year average which implies that there's still a lingering level of uncertainty surrounding the equity market outlook. This has historically been one of the catalysts for safe haven purchases of gold.

Participants shouldn’t assume that the fear factor will necessarily carry the gold price in their favor, however. I recommend closely watching the $12.62 level in the iShares Gold Trust (IAU), my favorite gold trading vehicle, in the next few sessions. A violation of this critical level in the gold ETF on an intraday basis would likely turn the immediate-term tide firmly against the gold bulls.

Source: www.BigCharts.com

On the mining stock front, the PHLX Gold/Silver Index (XAU) hasn’t yet confirmed an immediate-term bottom signal per the rules of my trading discipline. This requires a two-day higher close above the 15-day moving average - the XAU nearly succeeded in accomplishing this last week before last Thursday’s higher close was invalidated on Friday, Feb. 16, when the index abruptly collapsed and closed below its 15-day MA. It remains under this key immediate-term benchmark as of this writing as the XAU attempts to establish a bottom.

The next couple of sessions will likely tell the tale of how the ongoing bottoming process will end. Either the XAU will confirm a higher low above the Feb. 9 low, which would be ideal from a bull’s perspective. A confirmed higher low in which the XAU’s price line remains above the Feb. 9 closing low at just above the 78.00 level would tell us that buyers have control of the near-term trend and are doing enough buying to warrant a tradable rally in March.

In contrast to this, if the XAU falls to a lower level below the Feb. 9 closing low the reparation process will take longer and will likely portend considerable weakness in the weeks ahead. Much depends on the next couple of trading sessions.

Source: www.BigCharts.com

On a more promising note, the exceptional relative price position of Freeport-McMoRan Inc. (FCX) compared to the XAU is encouraging. FCX has proven itself to be a reliable leading indicator for the XAU index for many years and if its relationship to the index remains true to form, the odds of a March recovery in the XAU are indeed good.

Source: www.BigCharts.com

For disclosure purposes, I currently have a long position in the iShares Gold Trust (IAU) as of Feb. 14. I recommend using the $12.62 level (the Feb. 7 closing low) as the initial stop loss for this position on an intraday basis. Longer-term investment positions in gold also can be retained as the fundamentals underscoring gold’s two-year recovery effort are still favorable.

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