Gold continued to rally early Wednesday, up over 1% to nearly $1,640 per ounce. It's another explosive move for the yellow metal, an asset that's traditionally thought to be more of a hedge or investment. Long-term holders of gold claim not to sweat over volatility, but for traders or newcomers the question is how they should play gold now.
"You buy gold. You stay long above $1,525," says Rich Ilczyszyn, founder of iiTrader.com. "Every time we get to that level we see big buyers—perhaps central banks—adding to their coffers, physical gold. That's giving you a nice base," he notes, before cautioning, "if we close below $1,500 get out."
The next leg higher in gold would likely be driven by another round of financial stimulus from the Fed. Such action would weaken the dollar, moving all commodities higher and adding particularly high octane fuel to the gold rally fire. Shorting the euro (EUO) and owning dollars is the trade of 2012. As previously discussed on Breakout, a reversal in the euro is likely to be explosive given how crowded the bearish side of the trade has become.
Regardless of fundamentals and currency drivers, commodity trading usually comes down to charts of the asset itself. Gold has traded back to the mid-$1,500 level multiple times since early 2012, only to rally strongly. Traders like their charts to be obvious. According to Ilczyszyn, even the most rudimentary technical analysis makes gold's support level clear.
"Pull out your purple crayon, do your little chart, and circle those bottoms for the last two years. You'll see it clear as day. If we hold those lows you're golden," he states.
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