Gold on the Edge

Gold, currently trading at four-year lows, has not been looking too good lately.

In fact, the yellow metal hasn't maintained much popular appeal on Wall Street since its historic drop in April 2013, which accelerated a bear market in the precious commodity that has since shown no signs of abating.

We recently published an analysis on silver, as represented by the iShares Silver Trust ETF (NYSE ARCA: SLV), noting its clear break below long term support on the weekly chart. Silver has hurried lower ahead of gold in the latest commodities slump, but it seems that gold's turn for a more pronounced smack down in price could soon be approaching.

$GLD : SPDR Gold Trust ETF

As evident from the weekly chart above, gold, as represented by the SPDR Gold Trust ETF (NYSE ARCA: GLD), closed below a key support level on Friday, finishing the first week of trading in October at $114.61. It has been steadily losing value since early August.

Friday's close is noteworthy because GLD has not finished below $115 on the weekly time frame since April 2010. As highlighted by the blue box on the chart, it was the break above $115 and persistent push through that level after the Summer of 2010 that ultimately set off the final phase of the yellow metal's epic bull run going into 2011, in which GLD peaked at $185.85.

There is an old trader’s adage that double bottoms and double tops tend to hold but triple bottoms and triple tops do not.
— Dan Norcini, Professional Off-the-Floor Commodities Trader & Blogger, in a 10/3/14 post

The $115 level is also significant for GLD since it has held as a double bottom on previous downturns in June 2013 and December 2013, as pointed out by the mini blue arrows on the chart. Note that although GLD traded below $115 on both of these pullbacks, it did not close below $115 on any weekly candle stick, as the bulls ferociously defended the price from falling further.

Considering the bulls were unable to hold the $115 level going into the close of trading on 10/3, this does not bode well for them. If the bulls are unable to regroup and bearish momentum picks up, a further pull back in GLD is not out of the question. Should this occur, the $108 and $105 levels may potentially serve as support as they were prior congestion zones on the chart.

Conclusion

The concern that inflation would spiral out of control with the roll out of the Federal Reserve's Quantitative Easing program following the 2007/2008 financial crisis has not materialized to the extent that gold bulls had anticipated.

Additionally, the search for yield in the low interest rate environment that central banks across the globe have created has prompted many investors to chase stocks and neglect precious metals in hopes of higher rates of return on their capital.

Gold no doubt possesses an intrinsic value that cultures worldwide recognize. For long-term holders of precious metals, the current market environment presents buying opportunities at prices that haven't been seen in years. The question remains as to what level investors will price the yellow metal moving forward.

Geopolitical uncertainties could always serve as catalysts for directing capital flow back into the perceived safe-haven gold trade. However, with the US dollar continuing its impressive rise against other global currencies, the pressure may still be on gold longs.