Charts often are deemed to be a log of history, and to a great degree that’s a fair assessment. Just for the sake of discussion, though, consider the possibility that a chart is also a log of the market’s ever-changing opinion based on all the information available up to that point in time. And because opinions aren’t always rooted in facts, charts can disconnect from the underlying fundamentals from time to time.
For an obscure metal like rhodium or a microcap stock that doesn’t actually make anything yet, information might be scarce, and their charts might not reflect any meaningful opinion. But, this is gold — the most prolific, most watched and most traded instrument in the world. If the information and plausible outlook exists about it, it is reflected in the chart.
And gold’s chart says the market doesn’t see the worst that Currie sees.
If it did, gold wouldn’t be holding the line above $1,273 now, nor would it be fishing for a bullish bounce. It’s doing both of those things. And even the most likely worst-case scenario from a technical and psychological perspective is still just the June low of $1,190.
The Bottom Line
So what does a trader do if he or she agrees with Currie’s call, but also appreciates the strength of the counterargument?
First and foremost, know that not all the outlooks for gold are quite as bearish. Merrill Lynch, for instance, expects gold to end at $1,419 per ounce this year, and any slide should only take gold down $1,356 by the end of 2015. The London Bullion Market Association forecasts that gold will reach $1,400 per ounce at some point next year.
These firms aren’t exactly slouches in the gold arena, and have just as much of a shot at being right as Goldman Sachs does.
With proper caveats in place, the way to play Currie’s call might be a conditional one. If and only if gold falls under its current support line at $1,275 should a short — or bearish — trade be entered on the SPDR Gold Shares (GLD). Better still, you could simply buy an inverse gold fund like the PowerShares DB Gold Short ETN (DGZ) and not worry about permission to short a stock in your account. And although it might leave some money on the table, waiting for gold to move below the bigger floor at $1,190 might be a wiser move if you’re waiting to buy the DGZ or short the GLD.
But if there was ever a case for keeping a short leash on a trade, this is it.
While Currie’s bearish case is good, so too are the bullish arguments. And we’ve already seen how gold can stop and turn on a dime in this environment. No matter which direction you’re trading in, not only is a stop-loss a must, but it would be wise to apply a trailing stop, meaning you scoot that protective stop-loss along as your trade makes progress. That way you get out quickly when things turn against you.
However you decide to handle gold’s forecasts though, keep in mind that even the professionals are wrong some of the time — if only because gold’s value is determined by so many constantly moving parts.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.