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Today's Featured Article
One of the most frequent questions I have been asked lately has been "Is it too late to get into Gold?" Traders and investors are concerned the market is "overbought" and "too high". While Gold has gained $200 in two months, this is a long term story with plenty of upside potential.
In my
Turner's Take weekly newsletter I always stress we want to buy the strongest markets and sell the weakest. We want to buy high and sell higher, or sell low and buy lower. We have tried buying low and selling high. It has worked as well as "buy and hold" strategies, which is to say it hasn't worked at all. Anyone who has traded these markets knows how difficult it is to pick bottoms and tops.
Gold is the strongest market right now, and we either want to be long or on the sidelines. We do not want to be short under any circumstances. Shorting a run-away bull market like gold is as close to financial Russian roulette as you can get.
The USD is the weakest market right now, and we either want to be short or on the sidelines. We do not want to be long the USD. The Dollar is weak technically and fundamentally. The USD remains part of the new "carry trade" as investors are selling dollars and buying equities, commodities and foreign currencies.
Rarely can you be in a single trade where you are long the strongest market and short the weakest market simultaneously, but being long gold in US Dollars fits the bill. Since you are buying gold with Dollars you are essentially in a Gold/USD cross. This unique circumstance is one of the reasons gold has been able to trade to the $1200s so quickly.
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Fundamentally gold is the global currency of choice. The world's central banks are hording it and looking for any chance they can to substantially add gold to their national reserves. When the US Dollar started to weaken after exploding debt and the expansion of the money supply, we initially thought other foreign currencies would benefit most like the Euro, Pound and Yen. However, these countries are also having their own economic and fiscal problems. The currency of choice is not the Euro, Yen or Pound. The global currency of choice is Gold.
Gold is not only a hedge against inflation, but it is a flight to safety vehicle during tough economic times. The unemployment rate is over 10%, the economy is struggling, the national debt is on the rise, the US is printing money at a greater rate then anyone can remember, and there seems to be no end in sight.
Technically Gold is in a roaring bull market. We have been advising clients to get in after the break out over $1050 in October and willing to risk a few thousand dollars on every long-term position they take. Some analysts say the market is overbought but all great bull markets are always in an overbought state. Technical indicators like the RSI are most effective in neutral or mildly trending markets, but in very strong trending markets they are ineffective.
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On the weekly chart below we have been in a bull market since our Moving Averages crossed and the MACD turned bullish. When we enter positions we get our ideas from the fundamentals but wait for the technicals to tell us when to get into (and out of) the market.
 If you cannot view the Weekly Gold chart,
go here.
The question now is how to get into the gold market. We have a few suggestions on how a trader or investor can get long in the gold markets.
- Traders with accounts over $20,000 should buy any significant dip in February Gold. We would buy right now at $1211 and exit if we fall below $1190. That is a risk of $2100 per contract. We want to hold February Gold and wait for the run up to $1250. Once there is a close and held support at $1250 we will consider adding a second position for the run to $1300. Once there is a close and support held above $1300 we will consider adding a third position for the advance to $1400. This is a long-term strategy so if we are still in the trade by First Notice Day for Feb gold we will roll over to April.
- Traders with accounts under $20,000 can follow the same strategy with February MINI Gold which is a 1/3 of the size of the standard 100 oz gold contract.
- More cautious traders can buy February Gold at $1215 or better and then sell a covered Jan Gold 1250 call for $15.00 ($1500) and it expires 12/28. This gives us a buffer between $1200 and $1215. We would only risk $1000 per position. As Gold moves towards $1250 it should initially stall out at resistance before going higher. If Gold does break $1250 the trader will have at least a $3500 profit from $1215 and can repeat the strategy for the next month.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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About the Author
Craig Turner is a Senior Broker at Daniels Trading and the author of the
Turner's Take weekly newsletter as well as the creator of the Turner Breakout Reversal (TBR) trading methodology.
Craig began his career in the Financial Industry in 1998 at the NYSE and then moved on to Goldman Sachs as a Technical Analyst in 2000, focusing on Commodity and Futures trading systems. He joined Daniels Trading in Chicago in 2007 as a Futures & Options Broker and uses his understanding of Fundamental and Technical Analysis to help traders identify and act on trading opportunities in the Commodity Futures & Options markets.
Craig has his bachelor's degree, cum laude, from the Rensselaer Polytechnic Institute (RPI) and his MBA from Stern School of Business at New York University (NYU), which was part of the Goldman Sachs Executive Program.
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