The Golden Question
Fundamentals
Gold prices have pulled back slightly this morning, after rallying four straight days on weaker equity index futures prices. The precious metal remained impressively strong last week, posting gains despite weaker energy prices. The continued strength of global equities has fueled speculation that inflationary pressures will begin to pick up speed. While the news that China plans to curb excesses in heavy material industries can be seen as bearish for base metals and energies, the impact on Gold remains to be seen. The overall negative tone the news sets for heavy metals, coal and petroleum could spill over into precious metals, causing stagnation or weakness. On the other hand, traders still bullish commodities in general could exit base metals and energies and enter the precious metals market instead.
Some of the choppiness seen in Gold prices is directly related to the movement of the US Dollar, which has remained range-bound for the month of August. The outlook among analysts and traders seems to favor further downside for the greenback going forward under the crushing weight of government spending. The question seems to be when, rather than if, the dollar will falter. For this reason, the long-term outlook for the precious metal remains bullish. Nearer term, it seems that the Gold market could be trapped in range-bound trading, much like the greenback and equity prices.
Trading Ideas
Given the uncertain technical and fundamental outlooks, some traders may wish to enter into a neutral strategy - for example, a condor spread. Traders desiring to explore such a strategy may wish to consider selling the October Gold 1000 call (GCV91000C) and buying the October 1015 call (GCV91015C), for a credit of 2.20. At the same time, some traders may wish to sell the October Gold 900 put (GCV9900P) and buy the October 885 put (GCV9), for a credit of 1.50. The maximum profit on the spread is the initial credit of $370, and the maximum risk is $1,130.
Technicals
Turning to the chart, we see that the December Gold contract continues to trade in a sideways range centering around the 950 level. While the indicators and chart seem to point toward continued choppiness, the risk seems to remain on the downside. If the December contract were to close below the 930 level in the near-term, it would confirm a head and shoulders top, which could send prices below the key psychological 900 mark. Conversely, a close above 970 would negate the pattern and be seen as an upside breakout. The momentum indicator is showing slight bearish divergence from both price and RSI, indicating possible near-term weakness.
Rob Kurzatkowski, Senior Commodity Analyst
