Pros: 3 Reasons to Go Bullish on Gold

The price of gold fell sharply on Wednesday, making it the biggest one-day drop in three weeks. Many professionals still remain bullish on the precious metal. The big drop in gold prices was a result of a single customer selling 15,000 contracts of gold as soon as the market opened.

By: Drew Sandholm
Published: Wednesday, 28 Nov 2012
CNBC

The price of gold fell sharply Wednesday, marking its biggest one-day drop in three weeks, but some professional traders remain bullish on the precious metal.

From the floor of the New York Mercantile Exchange, trader Anthony Grisanti said he likes gold [GCCV1 1723.10 6.60 (+0.38%) ] for several reasons. To start, he pointed out that the price of gold fell after a single customer sold 15,000 contracts of gold as soon as the market opened Wednesday.

“Let me put that in context — we’ve already done, by 10 o’clock this morning, the volume we usually do in gold for a day,” said Grisanti, founder and president of GRZ Energy. “These weren’t new shorts coming into the ring. These were longs that were liquidating. Profit taking.”

Grisanti also still likes gold’s technical indicators, noting that despite the selloff, it has held support levels near of the lows of $1,703.

Speaking of technicals, trader Rich Ilczyszyn added to his long positions, as gold held $1,706.50, 200-day major support $1,670.00. He bought $1,709.0 for this trade and plans to stay long so long as gold trades above the $1,706 level.

"Consider out-of-the-money long call spreads if you want to stick your toe in the water," said Ilczyszyn, founder and chief market strategist of iiTrader, in an e-mail. "If we close below $1,700 we will see $1,670, which could be a buy the first time down."

Meanwhile, Grisanti added that another reason to get bullish on gold is that demand typically spikes during this time of year.

Grisanti also pointed out that the Federal Reserve is continuing its attempt to stimulate the economy by way of quantitative easing despite the looming “fiscal cliff” — a series of enacted legislation, which, if left unchanged, will result in tax increases and budget cuts on Jan. 1. The Fed’s one power is to create money out of thin air and it is currently using that power by way of quantitative easing. Critics argue the program will further devalue the dollar [.DXY 80.27 -0.06 (-0.08%) ] and ultimately create inflation, which is why many investors have bought gold as a hedge against inflation.

To options trader Jon Najarian, QE and the threat of the “fiscal cliff” will only help push gold prices higher.

“No matter what deal they make, it won’t happen immediately. It will happen six, eight months out into the future. Meanwhile, I think they’ll continue to print money, which will make gold more dear,” said Najarian, co-founder of OptionMonster.com, adding he's currently short puts of the ProShares Ultra Silver [AGQ 56.3915 1.5815 (+2.89%) ] exchange-traded fund, as well as the $162 puts of the SPDR Gold Shares [GLD 167.20 0.65 (+0.39%) ] ETF on the belief the latter could soon fall to the $160 level.

Asked by CNBC’s Jackie DeAngelis whether too many people are bullish on gold, Grisanti argued it’s one of few trades that’s likely to work in light of the uncertainty surrounding U.S. fiscal and economic woes.

“I think people look at gold as a safe haven, and I think with all the uncertainty in the market with the ‘fiscal cliff’ and everything else, gold might not be the answer, but that’s the answer to the people out there, and that’s why they’re putting their money in gold.”

From the pits in Chicago, Ilczyszyn noted one of traders remarked, 'this is not a trade, it’s a casino.' He thought that sumed up the mood quite well.

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