Cramer: Pros to Fall Back in Love with Gold?
If you want to start a fight on Wall Street, ask traders about gold.
Since it peaked last October, holding gold has been painful – the precious metal is down more than 30% from its highs.
Gold bulls insist the pullback is temporary while bears are equally adamant that the precious metal was in a bubble.
One of the challenges so often cited with gold is that it's hard to value; that is metrics such as quarterly earnings, quality of management and profit margins just don't apply.
Therefore, in an attempt to determine if the current price is too high, too low or just right, many pros turn to technical analysis to see what chart patterns suggest. In the following analysis Cramer turned to Carley Garner, the co-founder of DeCarley Trading and author of A Trader's First Book on Commodities for insights.
Looking at the Commodity Futures Trading Commission's Commitments of Traders Report on gold, Garner is starting to see some bullish signs.
According to Garner, right now, large speculators—meaning big Wall Street players—are currently holding their smallest net long position in gold futures since 2009.
Collectively, they have a net position of about 43,000 futures contracts, which Garner views as a surprising because, since the turn of the last decade, institutional investors have often held net long positions of more than 200,000 contracts.
Plus, Garner says small speculators have also given up on gold in droves—they are holding just 423 contracts. She says that's next to nothing.
As noted above that's bullish because these figures suggest to Garner that the washout in gold is nearly complete. That is, the market may be reaching a point where most of the people who were going to sell, have sold.
And there are other bullish signs.
Looking at the monthly chart of gold futures, Garner notes that historically, gold futures have a strong tendency to find a seasonal low at some point in July, typically in the second half of the month.
That suggests we're just a couple weeks away from the moment when the calendar says gold should bottom.
Also, Garner is seeing bullish signs in the Relative Strength Index or RSI. For gold, the RSI is now below 30 and that's the lowest reading in more than 13-years, and when this indicator is down that low it suggests that gold has become seriously oversold.
Garner says similar patterns are presenting themselves in the Williams %R indicator. Specifically, she says the Williams %R just dipped below 30 for only the third time in the last 13 years, which suggests to Garner that gold is now oversold. On the last two occasions where the percent-R indicator dropped this low, gold prices rapidly recovered to post substantially higher highs.
All told Garner's analysis suggests gold is at or near a bottom. Therefore, she suggests buying gold on dips, especially if it drops below $1,200 an ounce. That's largely because Garner sees strong support at $1150 and then again at $1130.
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Cramer thinks Garner's analysis deserves careful consideration.
"At some point I too believe that gold will bottom," Cramer said. "And based on Carley Garner's chart work, that point could come sooner rather than later, with a rapid rebound following soon after. I like Garner's track record, and I think this is an important divergent view you should consider, especially given how far the price of gold has already fallen."
And looking at fundamentals, Cramer sees one more reason gold could rally. "At some point, traders are going to start falling back in love, especially as rates climb – that is they'll buy it as a hedge against inflation.
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