Gold had been flirting with the $1,800 level over the past few sessions, however, comments from Ben Bernanke coupled with robust economic data simultaneously paved the way for profit taking on Wednesday. Selling pressures hit the precious yellow metal hard after comments from the Fed painted a conservatively-optimistic outlook for the U.S. economy, putting a damper on inflation expectations. Gold prices dropped over 4% on the day as Chairman Bernanke’s testimony did not offer any indications that another round of quantitative easing would be initiated [see Why Warren Buffett Hates Gold].
Stock markets started off the week on a shaky note after durable goods orders data missed expectations, although a surge in consumer confidence helped investors brush off worries about the domestic recovery. The big news on Wednesday was the better-than-expected GDP report; economic output in the fourth quarter came in at 3%, blowing past the previous reading of 2.8%. Safe haven demand for Treasuries and precious metals alike dropped off as investors instead rejoiced over encouraging fundamental economic data [see Doomsday Special: 7 Hard Asset Investments You Can Hold In Your Hand].
Consider the daily gold futures chart below. Notice that trading volumes went through the roof when selling pressures hit yesterday. The precious metal was quick to back away from resistance at the $1,800 level; the last time gold encountered pressures at this level was on 11/8/2011, and the precious metal proceeded to fall below $1,600 in the weeks following. What’s worrisome this time around is the fact that trading volumes were very high, which may lead some to believe that the price action was more than mere profit-taking, and perhaps a reversal point [see also Seven Reasons To Hate Gold As An Investment]. If gold prices fail to hold above $1,700 in the coming days, investors should note that the next level of major support lies near the $1,600 an ounce level.
Ways To Play
Investors who wish to short gold, believing the precious metal has been long overdue for a correction, or those who want to buy in on the dip have a multitude of instruments available at their fingertips. Traders will likely opt for the most direct method which is through the April GC Gold futures contract offered on the COMEX. The April contract is currently the most heavily-traded future and will offer the best liquidity.
However, not everyone is savvy to futures markets as they can be quite complex and difficult to understand. Mainstream investors should consider GLD, which is an extremely popular ETF that measures physical bullion. For cost-conscious investors who prefer the ETF structure over the long-haul, the iShares Gold Trust (IAU) also offers physical gold exposure at 15 basis points less than GLD.
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Disclosure: No positions at time of writing.