Has Gold Found Support at $1,325/Ounce?

Source: Thinkstock

Source: Thinkstock

Last week I wrote an article in which I suggested that there was a good chance that a correction in the gold market had begun. Despite the fact that there were escalating tensions between Russia and the United States after the Crimean vote to join with Russia, and despite extreme bullishness in the market (I cited an article claiming that gold would climb 10 percent – 20 percent last week), the gold price had reached a near term top at $1,390/ounce and a correction was in order.

This turned out to be correct. The gold price briefly hit $1,320/ounce before bouncing back to around the $1,330/ounce level. The catalyst for the correction was the FOMC meeting and fear that the Federal Reserve would raise interest rates sooner than initially thought. Just as greed led me to predict a correction last week, I think this new fear is a positive development for the gold market. I think that the correction, as brief as it was, may be over, and that traders should consider adding to their gold positions at $1,325/ounce. Here’s why.

First, we have seen signs of economic weakness from falling copper prices to weak earnings results coming from bellwether companies such as Wall-Mart (NYSE:WMT), and more recently, Nike (NYSE:NKE). This economic weakness will force the Federal Reserve to maintain its loose monetary policy. It will also push money out of stocks and into safe-haven assets — gold being one of them.

Second, tensions between the U. S. and Russia have actually escalated in the past week with the U. S. imposing economic sanctions on Russia. Even though this wasn’t a catalyst for the gold price upon the initial announcement last week, it will eventually push gold prices higher, especially once investors have had time to digest the news and to fully appreciate the situation. I think patient investors such as myself who saw euphoria in the market at $1,360/ounce and higher are a little more comfortable entering at $1,325.

Third, a very strong technical pattern is developing in the gold market. We are seeing higher lows and higher highs for 2014, meaning that whenever gold corrects it fails to make a new low before buyers step in. This means that investors are interested in purchasing gold. Second, we are seeing the 50-day moving average “$125.19 for the SPDR Gold Trust (NYSEARCA:GLD)” reach a point where it is close to crossing above the 200 day moving average ($125.57 for the GLD). This pattern — called a “golden cross” — is extremely bullish. This should be a near-term catalyst that will drive prices higher.

It also signals that a longer term uptrend is developing. We are seeing something similar in the gold miners, as measured by the Market Vectors Gold Miners ETF (NYSEARCA:GDX). On Friday, the 200 day moving average closed just $0.03 above the 50 day moving average, which means that we will almost certainly see a golden cross early this week. Bullishness in the mining stocks means that more aggressive gold traders are bullish on the sector, and this bodes very well for gold prices.

There is still a possibility that we can see gold prices trade lower. However, given the strength we saw in the market after gold hit $1,320, and given what we are seeing develop between Russia and the United States, I suspect that we are going to see gold stay true to its “safe haven” role in the near term, and this will be a catalyst that drives prices higher.

Traders interested in playing this bounce off of the $1,325/ounce level should consider buying GLD shares at around $127.50/share.  Investors interesting in buying gold and holding it for a longer period of time should look at the Sprott Physical Gold Trust (NYSEARCA:PHYS), which has better tax treatment than the GLD.  PHYS is taxed like a stock, so if you hold it for longer than a year your profits are taxed at the capital gains rate, which is 15 percent or 20 percent depending on your tax bracket. GLD profits are taxed as gains from the sale of collectibles, which are taxed at 28 percent.

Disclosure: Ben Kramer-Miller owns gold coins and select gold miners.

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