All Systems Gold
Fundamentals
Gold futures are lower this morning, continuing their pause after climbing more than $70 an ounce from recent lows. This can be seen as a much needed pause after climbing sharply, which may prevent the market from going boom and bust. Investment demand for the precious metal may continue to increase if the Euro continues to post gains versus the US Dollar. The greenback has been under attack from several fronts. Commodity based currencies, such as the Aussie, the Canadian Dollar and Brazilian Real, have had extremely strong showings on gains in Crude Oil and base metal prices. The Euro is beginning to recover against the Dollar after the EU reached a compromise on the Greek bailout plan. Finally, demand for US treasuries has eroded because of the continued resilience in global equity markets and concerns that the market is oversupplied due to the mountain of debt issued in recent months. All of these factors seem to point toward stronger Gold prices. Consumer spending is beginning to increase, albeit sluggishly, which when coupled with rising Oil prices, could open the door for inflation to seep into the economy. While all of this is bullish for Gold, the precious metal market is not without downside risk. Gold traders have been an increasingly fickle bunch, losing some of the gusto that had helped push the price of the metal to current levels. The sharp increase in Crude Oil prices may be a major economic concern going forward. If the price of black gold reaches the triple digits, it could break the back of the economy. After the housing and lending markets had a meltdown several years ago, it was the sharp spike in energy and commodity prices that was the final dagger to the US and global economies. An exact replica of this scenario is highly unlikely, but increasing consumer costs could result in a sharp reversal of the economic recovery, leading to lower precious metals prices. High double-digit Oil prices could support a rally in Gold without an unraveling of the recovery
Trading Ideas
Given the bright fundamental and technical outlooks, some traders may wish to take on a bullish position in Gold. The bullish enthusiasm could be clouded, however, if the Crude Oil rally goes unchecked. For this reason, a bull call spread may possibly be in order for some traders, and they may wish to investigate buying the June 1180 calls (GCM01180C) and selling the June 1200 calls (GCM01200C) for a debit of 8.00. The spread risks the initial investment for a potential profit of $1,200.
Technicals
Turning to the chart, we see June Gold crossing resistance at the 1150 level and pausing. This consolidation on the daily chart, which appears as a small pennant, seems to favor further gains since the preceding move was up. Closes below the 1150 level can be seen as a technical setback for the market. Failure to break down below the 1150 level suggests that the market may possibly be ready to attack all-time highs above 1200. The overbought conditions on the RSI may have contributed to the sluggish action recently. Now that the indicator has come back down to neutral levels, buying pressure may ensue.
Robert Kurzatkowski, Senior Commodity Analyst
