Gold tested a low of $1,130 per ounce in early November and is now trying to recover some of its luster.
Gold closed back below the $1,200 level and the 50-day moving average on Monday after testing a low of $1,191 an ounce. There is additional risk to $1,180 over the near term, and a close below $1,175 – $1,170 will likely lead to a backtest to fresh multi-year lows.
With this in mind, I checked the 10-year chart for gold, and it’s just as bearish. The monthly chart below shows gold struggling to hold its 100-day average at $1,191, with potential risk to $1,000 – $800, which means that another 20% – 30% decline is possible.
Needless to say, the next few weeks could offer better clues as to whether it’s time to go long or short gold. A recovery above $1,200 – $1,220 would be a bullish sign, while continued closes below $1,200 would be bearish.
The easiest way to trade gold is to trade the SPDR Gold Trust (ETF) (GLD).
Investors could buy shares to play support and resistance, but the options are a “cheaper” way to speculate on gold’s moves up and down.
The close below $115 and the 50-day moving average is still playing out but has opened the door for a possible test to $110. The 52-week low is at $109.67.
The GLD February 109 puts could be used to play a possible breakdown to $110, but these options would technically be “out of the money” if GLD holds this level through mid-February.
Therefore, the aforementioned put options would expire worthless, which shows the time premium built into these options. However, if $110 fails to hold, a test to $105 – $100 could come as another round of selling pressure hits gold. If so, the aforementioned put options would easily double.
This trade could be entered with a stop set at $119 on a rebound in gold.
With the longer-term trend still showing weakness, I like the risk-to-reward ratio this gold trade has to offer, but I still want to wait a few days to see how the action is going to play out.
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