Did Gold Get Too Overheated?
Fundamentals
Gold traders have been accustomed to wild ranges and high volatility, but the last few sessions have had wild swings that even the most seasoned traders have been left scratching their heads. Friday's sharp sell-off put an end to the sharp upswing in prices of the past few weeks, if only temporarily. The question now becomes - is this a trend reversal or simply a correction? Fundamental factors have been working in the precious metals' favor, as government spending continues at an unsustainable rate and interest rates remain low. The meteoric rise in prices, however, may be making traders reluctant to buy at current levels and has given holders of long positions the opportunity to take profits. As prices correct, traders may wish to see how prices behave at current levels. If prices are able to level off, traders may view this as a buying opportunity, making the current sell-off nothing more than a bump in the road. If prices begin to slip, Gold may come under extreme pressure if long-holders resolve is shaken. Gold may find itself a victim of its own success if traders view the rise in prices as too much, too soon.
Trading Ideas
Given the shakeup in the Gold market, some traders may wish to wait for the market to offer clearer confirmation of a trend. The fundamental outlook for the metal remains positive, as long as central banks keep monetary policy loose and keep buying reserves of the precious metal. Profit-taking pressure may overwhelm the market in the near-term, given the sharp run-up in prices over the past few months and the fact that we are slowly approaching year-end. Some traders willing to take a gamble that prices will correct further may possibly wish to consider testing the short side of the market by selling a futures contract on a close below 1120, with a protective stop at 1150 and a downside objective of 1070. The trade risks $3,000 for a potential profit of $5,000. This should be viewed as a somewhat risky trade, which may not be suitable for all traders.
Technicals
Turning to the chart, February Gold showed a parabolic rise in prices during the month of November and into the beginning of December. Thursday's spinning top candlestick was a signal of at least a near-term correction. The sharp drop in prices on Friday offered validation of at least a short-term correction, possibly a large one. Monday's price action indicated much indecision among traders. It appears that the overbought conditions may have added to the selling pressure on Friday, but the RSI has come back down to neutral territory. The momentum indicator is nearing the zero line. If the indicator falls below the zero line, prices could see further downside pressure.
Rob Kurzatkowski, Senior Commodity Analyst
