Will the Federal Reserve Clobber Gold?

(credit Fidelity.com)

Gold has basically been going sideways for about 2 months now, trending sideways after a local high. There is some debate out there about what level traders should watch for gold.  Your friendly Gold Enthusiast likes to err slightly on the side of caution for several reasons.  First, keeping levels “tight” leads to overtrading, also known as “getting whipsawed”.  Slightly wider, more realistic levels that take into account the market’s predilection for occasional blips lead to better trading and much lower blood pressure.

Secondly, you have to gauge whether a blip is a blip, or if it really is the bottom of a channel. In the case of gold, the downward blip in question came on 9/30 and 10/1, when GLD dropped just below 138. It recovered to finish the day on 10/1 at 140, but there are two solid chart points at 138.

Now, 138 was first ID’d as a possible important price back on 8/5 when a spinning top centered on 138. Spinning top centers don’t always indicate important prices for the future, but sometimes they do, so you have to keep an eye on them.  So that adds a little weight to the discussion.

Finally, there are lower wicks extending down into the middle of the 138-to-140 range on 10/11 and 10/15. Lower wicks tend to give warnings, which is why they’re sometimes called “shadows”. Around here we also call them “pointy fingers”, pointing out what the possibilities might be.  Enough pointy fingers in one direction means get ready, something’s about to happen.

Back to the Fed. We fully expect the Fed to lower its benchmark rate of 0.25% today. That’s probably already priced into the market, though you should expect the usual 2-5 hour hangover thrash. We’re looking for a small upward thrash in equities, and a small downward thrash in gold and silver.

If we see GLD close below 138 it may be time to possibly buy a put option to guard against any further downward activity. With no resolution in sight for US Federal deficit issues, a banking system lacking liquidity (how is that even possible when “everything is so good”???), and international markets weakening by the day, the long-term picture for precious metals still looks strong, so we’re not looking to sell anything at the moment.

Signed,

The Gold Enthusiast

DISCLAIMER: The author has no direct position in any security mentioned in this article. The author is long the gold sector via positions in NUGT, JNUG, a few junior miners, and covered calls on part of the NUGT position. The author may initiate new covered call positions in NUGT and/or JNUG in the next 72 hours if market conditions warrant.

SPDR S&P 500 ETF Trust ( SPY) was trading at $302.83 per share on Wednesday morning, down $0.38 (-0.13%). Year-to-date, SPY has gained 13.93%, versus a 13.93% rise in the benchmark S&P 500 index during the same period.