Watch This Gold Chart Closely!
Things are starting to get interesting for gold…
As you’re likely aware, the yellow metal has been stuck in a decidedly lackluster trading pattern for the past few months. Uncertain fundamentals have kept it floating in a range between $1,250 an ounce and $1,200 since mid-November.
But now the metal is seeing a definitive uptick in investor interest. In fact, gold is the top performing metal since the start of 2014 with a gain of 4%. But more importantly, the recent jump has the yellow metal trading at a very important technical crossroads.
Take a look…
Thanks to a $30 an ounce jump last Thursday, gold is on the verge of breaking above a very important downtrend line. As you can see, the red line in the chart above has kept the metal under wraps since March 2013.
What’s the big deal about that?
A solid break above this highly watched resistance line would drastically change the metal’s technical sentiment for the better. Every time gold has risen to this line in the past year, it’s been met with substantial selling pressure.
However, this time it could be different…
If investors get another whiff of bearish global growth data like they did last week, we could see a rather large short squeeze in gold. After all, plenty of hedge funds are still heavily short the metal, feeling it’s destined to fall to $1,000 an ounce or lower this year.
That’s right, even though gold was down nearly 30% last year, hedge funds feel it is still substantially overvalued.
But here’s the deal…
Another break higher will force hedge funds to alter their thinking. After all, being heavily short a commodity that’s already trading near multi-year lows can turn into a disaster very quickly. And that’s especially so if the asset is breaking above important technical hurdles like gold’s doing right now.
From a hedge fund’s standpoint, it will simply be too risky to stay short gold if it rises substantially above the red line in the chart above.
Is there a way for you to profit from a potential gold squeeze?
First of all, you’ll need to keep a close eye on the metal’s reaction to the FOMC meeting this Wednesday. As you’re likely aware, the Federal Reserve Bank is tapering bond and mortgage backed securities by $10 billion this month.
But if there’s any sign the Fed is getting worried about the recent uptick in bearish global growth data, they may alter their plan. And if they do, it could be what ignites the gold short squeeze.
One of the easiest and least expensive ways to trade gold is via the iShares Gold Trust (IAU). As you may already know, shares of IAU are backed by physical gold. If the price of gold rises, shares of IAU go up as well.
Until Next Time,
Justin Bennett
Category: Gold
