Is Crude Stealing Gold's Thunder?
Fundamentals
Gold futures continue to meander in sideways trading due to the choppiness of the US Dollar and the lack of fresh buying interest. The unexpected Dollar rally had caught precious metals traders off-guard and has caused some traders to rethink their strategy. Over the long-term, Gold fundamentals remain bullish, and the large 2, 5 and 7-year note auctions think week suggest that the US government is unlikely to halt its spending spree anytime soon. In the near-term, however, it looks as though the strength of the greenback and reluctance of traders to buy at relatively high levels may limit the upside potential of the market. The ICE exchange showed that speculators have actually gone net long the Dollar Index, suggesting traders are now expecting the US currency to rally in the near-term. The strength of the Crude Oil market in recent weeks has also stolen some of Gold's thunder. We have seen that while Crude Oil and Gold tend to move in the same direction, the percentage moves have varied greatly at times over the past two years. Crude Oil had been underperforming against Gold when the precious metal was soaring, and it now looks like "black gold" may be the market speculators are focusing on because of a change in petroleum fundamentals. Even with the positive shift in Crude Oil fundamentals, that market may be heading toward a stumbling block. The geopolitical tension with Iran and renewed terrorism fears could cause a shift toward positive sentiment in Gold, but if fears fail to materialize as larger legitimate threats, the metal could continue on its current path.
Trading Ideas
The near-term fundamentals for Gold may continue to be driven by the movement of the US Dollar. The fact that speculators have once again gone long the Dollar Index suggests that the upswing in the greenback may continue, pressuring Gold prices. Technically, Gold has not had any fresh technical setbacks, but remains extremely vulnerable if support near 1075 and 1065 is broken. For these reasons, some traders may wish to short the February Gold contract on a close below 1065 with a protective stop at 1080 and a downside objective of 1035. The Trade risks roughly $1,500 and has a potential profit of $3,000.
Technicals
Turning to the chart, the February Gold contract shows prices consolidating after selling-off sharply. When markets consolidate, a breakout tends to follow the preceding trend that headed into the consolidation. For this reason, the 1075 support level is key for Gold traders. If prices close solidly below this level , it could possibly signal the beginning of a new down leg for the metal. Since breaking the 50-day moving average, the February contract has been unable to gain enough upward momentum to cross back upward through the average. A close above the average could signal price stability. The 20-day moving average is closing in on the 50-day. A downward crossover of the two averages could be a sign that technical momentum is working against Gold.
Rob Kurzatkowski, Senior Commodity Analyst
