Gold: "I Bought the First Break, I Bought the Second Break, and I Was the Third Break!"

Recent Performance 

In a recent article, "Gold: Buy the Dip or the FOMO Trade?" I discussed how the gold market could be at a turning point due to a couple of factors:

• The February contract was near First Notice Day (FND), and all long positions would be required to exit or face delivery of 100 ounces of gold per contract held
• Gold had rallied 20% from its seasonal low in October 
•  The Chinese government offered to relax its zero-tolerance pandemic policy as the country approached its New Year festivities. But will they follow through? 
• There was significant overhead resistance near $2,000 per ounce. 
• Managed money had an amount of accumulated long positions that had signaled a market turn in the past. 
• A seasonal pattern had warned of sideways to down market activity during this period

Since the article's writing, as mentioned above, an employment report came out with an extremely high level of new jobs created, which is bearish for Treasury and gold prices. The Federal Reserve (FED) soon announced that the Fed Funds target could increase. This new target has put pressure on gold prices due to the competition for higher investment yields. 

Today, as I write this article, the 2-Year and 10-Year inverted yield spread reached 85 basis points, the largest since the 1980s, signaling more concern about the inevitable recession. Events such as this result in the yield curve needing to be re-aligned, selling the short end of the curve and buying the long end. News like this is adding to the selling pressure in the gold market. 

 In another article, "10-year Treasury Notes: Higher or Lower Rates to Come?" I discussed how the current seasonal pattern could take 10-Year yields towards 4% from current levels. Higher interest rates are a strong headwind for higher gold prices. But, interestingly enough, both gold and 10-Year treasuries have historically had a strong finish by the end of February. 

Seasonal Patterns 

Gold's seasonal pattern. 

Source: Moore Research Center, Inc. (MRCI) 

Moore Research Center, Inc. (MRCI) research illustrates the strength that gold demonstrated in the past months of February after an early month of sideways to down price activity. 

March typically brings in the seasonal highs for gold prices. This last run-up in prices could be related to leftover euphoria from the Chinese New Year and the Chinese markets returning to full strength after being closed for the holidays. 

10-Year Treasury seasonal pattern. 

Source: Moore Researsch Center, Inc. (MRCI) 

Reviewing the historical price activity, MRCI has found that 10-Year Treasuries prices drop (yields rise) until approximately mid-February. As gold and Treasuries are closely correlated, this mid-month bottom in Treasury prices could be the catalyst to push gold prices higher into their seasonal climatical high prices near March. 

Technical Picture 

 The 10-Year Treasury market has found yield support at the 3.5% vicinity. With anticipated seasonal lower prices, a logical target would be for yields to rise (price to drop) to the 4% area. 

Upon reaching 4%, the prices could sync with the mid-February seasonal low, and the resulting rally will benefit higher gold prices. 

Gold for the Patient Trader/Investor 

The daily gold chart shows an area near the $1,850 area as a possible location where gold could catch a bid. Suppose the 10-Year Treasury arrives at the 4% vicinity at a similar time as the gold market reaches the $1,850 area. In that case, we could have a good February finish to both markets to the upside. 

Related Gold ETFs and Futures Contracts to Participate 

If the seasonal pattern is expected to last long, consider using the Exchange-Traded Fund (ETF) for gold (GLD). Both GLD and GC have options available to trade. The first choice would be trading the standard gold contract (GC), but if that is too expensive, consider the micro-gold contract (GR), exchange symbol (MGC.) Another ETF (GLDM) reduces capital requirements but tracks the GLD closely.

Summary 

Looking at the gold chart, notice how the prices have had one break to the downside from the recent peak. And after pausing, it breaks for the second time. Buying before a support level can lead to multiple losses. The title of this article was a quote from the trading floors when traders kept buying breaks, and then they had to exit all their losses which caused the third break. Don't let this happen to you. Pick a logical location on your charts to buy, and patiently wait for the trade. If the price doesn't get to your location, so be it. There are always other opportunities to trade. 

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