New Year, New Life?
Fundamentals
Gold futures have been steadily climbing over the past three weeks on a reversal in the Dollar and positive economic signs. The precious metal may, however, face pressure if the Fed hints at increasing interest rates, which could bolster the Dollar. Further signs of economic strengthening can be seen as a near-term positive for Gold, as it hints at inflationary conditions. Over the long-term, stronger conditions would likely force the Fed to raise rates on concerns that the low interest rate environment will overheat the economy. If the central bank maintains its soft tone and does not hint at raising rates, precious metals prices could come up to test $1,200 an ounce or higher. The strength in energy prices has aided the Gold market, but the precious metal has failed to keep pace with Crude Oil. This is a trend that may continue, given the improved fundamental outlook for energies due to destocking and the colder than expected winter. If energy prices do continue to push higher, traders can look for the upswing in Gold prices to accelerate.
Trading Ideas
Gold fundamentals have improved over the past two weeks on the weaker Dollar and stronger energy prices, and the technicals for the precious metal have also improved. However, there are still lingering questions about the Fed's interest rate policy and continued appetite for the metal by traders. Also, the February Gold contract has some technical hurdles to climb. For this reason, some traders may possibly wish to take a cautiously bullish approach to the metal by buying the February Gold 1150 calls and selling 1160 calls for 2.50, or $250. The trade risks the initial investment for a maximum profit of 7.50, or $750 if the February contract closes above 1160 at expiration.
Technicals
The February Gold chart shows prices finding support at the 1070 level in the near-term and has come up to test near-term resistance at the 1140 level. How prices behave at these levels will likely set the near-term direction for the market. Failure to close above 1040 could cause Gold to trade range-bound or possibly to trend lower. The 20-day moving average has crossed below the 50-day average, which can be seen as negative over the intermediate term. However, this crossover is hardly a convincing signal, as prices have closed back above both averages, signaling that a near-term low may be in place. The momentum indicator is speeding toward the zero line and is showing bullish divergence from the RSI indicator.
Rob Kurzatkowski, Senior Commodity Analyst
