Appetite for Risk Hurts Gold
Today's Idea
While the fundamentals on Gold seem to be quite mixed, the momentum of the market indicates that prices could move lower. Many traders seem to favor equities and economically sensitive commodities at the present time. Technically, the Gold chart shows signs of near-term support, but prices remain at vulnerable levels. Some traders with a bearish predisposition on the Gold market may wish to look into trading a bear put spread, buying the March Gold 1325 puts and selling the March 1310 puts for a debit of 6.00, or $600. The trade risks the initial cost and has a potential maximum profit of $900 if the underlying April futures contract closes below 1310 at expiration.
Fundamentals
Gold futures seem to have everything lining up for them, but have continued to trend lower lately. Indian imports jumped 18% over last year, and the People's Bank of China is likely looking to bolster its reserves of the metal. In addition to the increased demand from the two Asian heavyweights, the Egyptian unrest has the potential to drag on for an extended period of time. The increase in Crude Oil prices has had a negative impact on Gold trading as well. While it may seem counter-intuitive, many traders that participate in the Gold market also trade Oil. It seems that a good portion of the trading capital normally allocated to Gold has been diverted to petroleum instead. Traders' appetites for risk have also increased, fueling gains in equities, base metals and petroleum at the expense of safehaven investments. Interest rate expectations have also decreased, which has been somewhat supportive of debt and could help precious metals in the long run. In the near-term, however, it looks as though Gold may play second fiddle to riskier investments.
Technical Notes
Turning to the chart, we see the April Gold contract breaking down below support near the 1365 level. Also, prices are now trading below the 100-day moving average, which can be seen as a negative in the intermediate-term. Failure to hold the 1322 level could result in further selling pressure, and prices may come down to test support near the 1250 mark. In the near-term, it looks as though the bullish divergence and RSI could be positive signs. The RSI is now at oversold levels, also hinting at near-term support.
Rob Kurzatkowski, Senior Commodity Analyst
