What the Heck to Do With Gold Here?

The story of gold is not a new one. The yellow metal has dropped precipitously in the last quarter, it's worst in over seven decades, and is down over 35 percent from its high back in 2011.

So, the real question is, what the heck do we do with gold here?

Lower Inflation Expectations

Inflation expectations have been lowered sharply since the Fed has cut its forecasts alongside other officials. Despite the rise in bond yields, the difference in yields between nominal and inflation-adjusted bonds has narrowed, meaning that the market now expects inflation to be lower than previously thought.

This drop has weighed on gold precipitously. After all, gold is a store of value, a hedge against inflation. Inflation erodes the value of the dollar and thus increases the price of gold. Thus, as inflation expectations fall, gold goes with it.

Technical Breakdown

After reaching a cycle and record high back in 2011, the yellow metal made a double top and dropped sharply. To technical traders, this was an ominous sign. Gold then chugged sideways forming a massive wedge before failing at a key level in mid-2012.

The price of the metal rose back to resistance that was the long-term uptrend from the 2008 lows and failed. From there, the rest was history. Gold fell through one technical level after another and has since fallen way down.

Not All Is Lost

Fans of the Gartman Letter, the daily markets Bible written by famed commodities trader Dennis Gartman, know of the 50-62.8 percent "box" that he uses to describe a range of resistance for assets on retracements of large moves. The "box" for gold's long-term move occurs between $1,155 and $1,300 and the metal could grind in this range for a while.

However, a sideways move may not be all that bad. Besides, this range implies more upside currently than downside and another test of the overnight lows near $1,170 could be a good entry point for traders to look for a pop. A stop loss at the $1,155 level would be a good support level to get out it and cap losses if it gives way there.

Interestingly, this chart also shows potential upside for the metal on a much more short-term basis. Gold has tended to track the South African rand with a slight delay, as South Africa is a large gold exporter and is sensitive to prices. However, gold currently sits below the currency and good pair trade could be to go long gold and short the rand against the dollar. In other words, go long gold in rand terms.

Contrarian Bet?

Is being slightly bullish gold, even remotely, contrarian at this juncture? Probably, but trading against extremely bearish sentiment tends to profit for those who know how to read the sentiment effectively and for those with years of experience.

And who better to have this experience than the experts at Sprott Asset Management, some of the best and most experienced precious metals investors and traders in the world. And for Benzinga Pro subscribers exclusively, David Franklin, Market Strategist for Sprott, live on the audio feed for an interview as to why he is turning bullish on the yellow metal as the market becomes increasingly bearish.

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