By Tomi Kilgore
Gold has looked so bad recently that some technicians believe it can’t get much worse, which makes it a good time to try buying.
Gold shed 12% last month, capping a second-quarter tumble of 23%, its worst quarterly performance in available history. In the process, the price of the SPDR Gold Trust GLD +1.70% exchange traded fund fell on Friday to the lowest level seen in three years.
“It’s looking like a tremendous washout,” said Mark Arbeter, chief technical strategist at S&P Capital IQ. “Sentiment has been extremely bearish,” and weekly momentum indicators have gotten oversold, “which is a good sign for [prices].”
Weighing heavily on gold were expectations that the Federal Reserve might start winding down its easing efforts, which to some investors would reduce gold’s appeal as hedge against inflation. Also hurting gold has been a rise in the value of the U.S. dollar.
- FactSet
On Monday, the most actively traded August gold futures contract was up 2.6% at $1,255.20, extending the bounce off a near three-year low of $1,179.40 seen in intraday trading on Friday. Meanwhile, GLD was up 1.8% at $121.23, well off Friday’s intraday low of $114.68.
That bounce, after such a dismal few months, has led some chart watchers to believe the worst of the declines are over.
“It feels to me that capitulation is at hand,” said Carter Braxton Worth, chief market technician at Oppenheimer & Co., which is why he believes gold prices are “headed higher.”
He thinks gold’s charts look like a reversal of August 2011, when prices reached a long-term peak. And the “despair” people are feeling now is similar in its intensity to the “euphoria” investors felt nearly two years ago, he said.
“At the very least, it’s time to cover short positions,” he said, meaning those who have been betting on further declines should close those positions. “We would look also for opportunities on the long side.”
But his bullish outlook for gold isn’t just based on a contrarian view that things look so bad that they have to be good. GLD has produced what technicians refer to as a “bullish engulfing” reversal pattern that suggests a short-term bottom had been hit.
On Friday, GLD opened below the previous session’s three-year closing low, and hit a fresh low in intraday trading before reversing course to close above Thursday’s open.
Therefore, it’s more than just a time to stop betting declines, said S&P Capital IQ’s Arbeter. Because of the recent sharp decline in gold, he said, there is very little on the charts that could be viewed as potential resistance until the $1,330-to-$1,370-an-ounce region for gold futures, and to about $130 for GLD. “So it’s possible we could see a fairly sharp snapback,” he said.
That represents previous support for gold at the lows seen from mid-April through mid-June.
Others think the bounce can go a little further than that. Worth has a target of around $1,395.
With technicians now seeing strong support at Friday’s lows, at around $1,180 an ounce for futures and at $114.68 for GLD, Worth said the reward-versus-risk profile of buying gold is “asymmetrically” in favor of bulls, suggesting it is now “worth playing from the long side.”
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