Gold Regains Its Luster

Gold is starting to look interesting here. Everyone was talking about the gold trade and the $1000 mark for the metal in February and March, and since then, investor interest in the metal has died down. Gold has pulled back and is now forming a bullish-looking consolidation within the primary uptrend channel.

Silver has formed a similar consolidation and is starting to set up for some bullish price action over the next couple of months. The structural bull market in precious metals appears to be intact, and the price action is starting to give the impression that a new leg to the upside could be developing relatively soon.

Any discussion about the potential strength of gold also involves the dollar and the potential weakness of the currency. The dollar remains in a confirmed long-term bear market. Every sign of strength in the dollar is met with calls for a bottom and a reversal of the primary downtrend in the currency. We simply don't see enough technical evidence to view the recent weak move off of the low as anything other than a counter-trend rally.

Gold and the dollar have moved in lockstep recently, and the bullish consolidation in gold has its counterpart in the bearish consolidation in the dollar. We could see this consolidation stretch out a little further, but we believe that at the end of the day, gold will break out to the upside, and the dollar will resume its long-term downtrend and probe for the ultimate lows.

The price action in gold and the dollar may also be sending another signal about how the Street views the Fed's course of action over the second half of the year. For the dollar to break down and gold to rally, we believe traders would have to come to the conclusion that the Fed is not going to raise rates any time soon to fight inflation, and they have to continue nursing a failing economy through next year. This realization may drive the dollar lower and start gold on another leg to the upside.

SPDR Gold

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The best way for us to participate in the potential upside for gold is through the SPDR Gold ETF (GLD - commentary - Cramer's Take). After peaking in March, gold has been pulling back, consolidating the strong gains which had seen the metal reach new highs. During the pullback, the uptrend was maintained and prices began to rally right from long-term support. This is positive, as it suggests buyers are coming back in, attracted by the opportunity to buy at better levels.

We would look for prices of SPDR Gold to continue to move higher and ultimately test the old highs in the $100 area. That would be a corresponding move to $1000 for the commodity itself. As far as the risk level is concerned, a break below the $89 level would indicate the recent improvement is not holding. We would use that level as a stop on long positions.

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At the time of publication, John Hughes and Scott Maragioglio were long SPDR Gold. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.