For the past month analysts have said that a bottom in gold was being formed. But then on June 19, 2013 Ben Bernanke, Chairman of the US Federal Reserve announced that he would begin tapering bond purchases by the end of this year and complete the program by the middle of next year. Selling started almost immediately after his announcement with the Dow Jones Industrial Average dropping more than 200 points. On June 20th, the selling got worse with the Dow plunging 353 points and gold dropping almost $99.00 per ounce. To put this in trading format each $1.00 in a gold contract equals $100.00. So, with a drop of $99.00, the value of one contract fell $9,900. If you held 10 contracts your loss would be $99,000. On June 21st, August gold closed up $7.30 per ounce to $1293.10
By all accounts we could say this was a washout. When this happens markets get into an oversold condition. New shorts entered the market driving the price down faster and more rapid. Now that’s over, what next? Technical indicators are showing that gold is oversold. If that is the case is it time to buy gold? Not just yet. Traders long gold got trapped. Now they are hoping for a bounce to sell out. What this means is that there are sell orders above the market adding to the already oversold condition. Knowing this the short sellers will stay in their positions hoping for prices to go even lower.
In most cases markets don’t turn around on a dime. It may take a few weeks into July before we can jump in. First there must be a “base building” period. If a new low is made the shorts will keep testing it, trying to force the market lower. These are days when the market action is real choppy, up one day and down the next. The lows will be tested and retested until they cannot be broken. The shorts will slowly cover their positions. When a short trade is completed the short seller must “buy” back his position. This creates new buying. This can last several weeks. We could see bouts of buying only to be followed by selling that brings prices back down again. This is not a time to be a buyer. It is a time to stand aside and let the professional traders thrash out where the bottom will be. After the dust settles, the shorts will have covered their positions and the longs will take control.
There is an old saying when trying to enter a long position: “Never buy the first low.” That low will surely be retested. If a second low is made but higher than the first one, now is the time to enter your long trade. You must be extremely careful and always use a stop loss order.
For those of you wishing to enter the market with ETFs, the most popular one is GLD. It is a gold trust that physically owns gold and tracks the physical price of spot gold closely.
Keep in mind that there are economic and worldwide political events that affect the price of gold. Be aware and follow them but do not be distracted. Follow the price action and you could see a nice profit.