Standing in front of the Basilica Di San Marco in Venice on Monday morning the permanent lure of gold is clear with the gilding on the portals sparkling through the early morning shadow. Gold endures, but that is not to say the upward trend in gold will continue at the same pace as seen in recent weeks.
Professional traders recognize a game changer when they see one. Japanese housewives, reputedly very active retail gold traders, are a little slower to recognize the rules of the game has changed. These two forces have been playing out in the gold market in the last 10 days. These are shorter-term influences.
The game changer changes the way we trade and perhaps the enthusiasm with which we can trade but it does not affect the longer-term secular trend in gold.
The game changer is the willingness of the futures exchanges to rapidly lift margin conditions and ‘squeeze’ the market. The fear amongst the more experienced professionals is that these margin changes will apply to gold and other commodities so they are rationalizing open positions. This has influenced the intense sell off that developed and it capped the rebound in the last week.
The rebound from $1,480/ounce to $1,520/ounce was created by the retail trader – the Japanese housewives. They were slow to recognize the way margin changes in silver had changed the ground rules for commodity trading. They bought on the dip, which is a classic trading strategy. The rally they created provided the opportunity for more experienced traders to sell into and capture the last profits from their open long positions. This selling drove the rally down to test support near $1,480/ounce again.
The key story with gold is the location of support. This will provide the base for a continuation of the uptrend, although the rate of the uptrend will be much slower as traders are required to carry larger margins. Support is provided by two features.
The first feature is the position of the long-term group of GMMA averages. These help locate the support price favored by long-term investors. This is where they will enter the market in larger numbers, probing a floor for the retreat and the rebound. Failure to hold at these levels puts the longer-term historical support levels into play.
The lower edge of the GMMA is located near $1,460/ounce. This represents a short-term support area for the re-test of minor support near $1,480/ounce. This is the upper edge of the long term GMMA.
The historical support is provided in the support band between $1,420/ounce and $1,440/ounce. This is the upper edge of the long-term sideways trading band that dominated the gold price from November 2010 to April 2011.
There is a high probability gold will test the $1,460/ounce support level before developing a slower uptrend rebound. If margin changes continue to flow through the system, then the lower targets between $1,420/ounce and $1,440/ounce are the valid support level.
It is important to understand that this is a market now driven by fear of regulatory change and this has replaced the speculative fervor that prevailed in previous months. A move above $1,520/ounce signals a continuation of the uptrend.
– Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com and producer of Gold – Mining the Markets. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.