Gold futures have been trading in a very tight, side-ways pattern lately, due to uncertainty over the economy and the exchange rate of the Dollar. The economy has shown significant improvement over the past few months, even prompting the Fed to use the word recovery in the minutes from the last policy meeting. The employment picture, however, remains a major concern for market observers and traders. This week will give traders plenty to digest in this regard, with the ADP employment change, initial/continuing claims, and non-farm payrolls reports set to come out later this week. The equity and currency markets have been extremely choppy and lacking direction, which has caused the precious metals market to behave in much the same manner. Traders have been extremely cautious entering the short side of the market versus the Dollar, which has contributed to the currency's success. Whereas the December Dollar rally seemed to be triggered by short-covering, there seems to be some actual spec buying. If the rally in the Dollar continues, inflation may be held in check, which may, in turn, put considerable downside pressure on the Gold market.
Given the bullishness in the Dollar recently, the market fundamentals do seem to favor the downside for Gold. Also, a correction in equity prices could trigger liquidation of commodity positions as well, further bolstering the US currency. It also appears that the daily April Gold chart shows vulnerability, although there has not yet been a downside breakout. Some traders may possibly wish to short an April futures contract on a close below 1050, with a stop at 1065 and a downside objective of 1010. The trade risks roughly $1,500 for a potential profit of $4,000.
Turning to the chart, the April Gold contract is trading near the 100-day moving average. Failure to hold the average could be seen as a technical setback in the intermediate term and a sign that there may be further corrections. Failure to hold near-term support at the 1064.20 suggests prices may come down to test the 1000 level, which is both technical and psychological support. Both the RSI and momentum indicators are flat and give no hint of the direction of the market near-term.
Rob Kurzatkowski, Senior Commodity Analyst