No Let-up
Fundamentals
Gold futures have shown no signs of a let-up, setting yet another record high yesterday on a weaker Dollar and central bank buying. Central banks have shown an interest in diversifying their holdings from currencies to hard assets, as evidenced by India's large purchases. Sri Lanka has been a buyer of Gold, and Vietnam is allowing imports of Gold for the first time in over a year to curb rampant speculation domestically. These purchases may fill some of the void created by the lack of jewelry and industrial demand for the yellow metal. The Dollar Index continues to fall, despite hopes that the stronger GDP number would take some of the selling pressure off the greenback. In general, investors have been looking to limit their currency exposure due to the liquidity pumped into the global economy by central banks. It looks as though the Fed, European Central Bank and Bank of England will maintain low interest rates for the foreseeable future. A major concern of many analysts is that central banks will not easily be able to raise rates to decrease liquidity without disrupting the economic recovery, making traders question the value of paper money. As a result, commodity prices will likely continue to rise, thus making Gold appealing to investors. The fact that prices have risen as quickly as they have may, however, subject the precious metal to selling pressure from profit-takers. Also, traders may be reluctant to buy at current prices, hoping instead for a pullback.
Trading Ideas
Gold fundamentals and technicals appear to be solidly favoring the bull camp at the moment. While the near-term technicals can turn at any moment, there would have to be a number of factors that would need to dramatically reverse course for the fundamental outlook to change. These include changes in central bank policy, a downturn in economic activity, and the Dollar strengthening. While everything does seem to favor Gold, traders need to question whether they wish to enter the market at these price levels. Some long-term traders may wish to take a patient approach and consider buying the December contract if and when prices pull back to the 1075 level, possibly with a protective stop at 1045 and an upside target of 1135. This trade risks approximately $3,000 for a potential profit of $6,000.
Technicals
The December Gold chart shows prices rising at an extremely sharp clip after breaking out above resistance at 1070. Holders of long positions will likely feel better about their positions if prices come back down to test -- and ultimately hold at this newly established support at 1070. The Gold chart has gotten a bit parabolic, and without a healthy correction, the market risks a significant technical breakdown down the road. At the present moment, the Gold chart does not show signs of an imminent reversal. The RSI is now at overbought levels, as are the slow stochastics, indicating that the December contract may face some profit-taking pressure. Momentum is also lagging behind the price and RSI, also indicting the market may face some selling pressure in the near future.
Rob Kurzatkowski, Senior Commodity Analyst
