Gold fundamentals have improved in recent weeks on several fronts. Turmoil, erratic currency markets, and economic fears have all aided the precious metal's push higher. However, stabilization in the currency markets and peaceful transition in troubled states could derail the rally. The chart is showing that Gold may be on the verge of breaking out, but overbought conditions may result in an extension of recent choppy trading. Some traders looking to go long may wish to consider waiting for a breakout above 1425.00 to buy an April Mini-Gold contract, with a protective stop at 1395.00 and a target order of 1465.00. The trade risks roughly $1,000 for a maximum profit of $1,328.
Gold futures are trading near highs from last year, fueled by Middle East unrest and concerns that the economic recovery may be stalling. Many traders are now pondering whether the Gold contract can continue to rise and make new all-time highs. There is uncertainty regarding whether the unrest seen in the Middle East will spread to major Crude Oil producing nations, namely Saudi Arabia. An extremist takeover would almost certainly stall Oil production, which could lead to a steep increase in fuel prices and bolster Gold's appeal. On the economic front, it appears that the rising cost of food and fuel has altered the spending habits of US consumers. The most recent retail sales report surprised many market observers with its strength. However, the personal spending figure released yesterday did show consumers being a bit tighter with their pocketbooks. Investor demand for Gold has increased significantly in recent weeks, and the reportable position has risen to the highest level since early December. This is likely evidence of strong demand from hedge funds and long-only funds. This could also be a sign that the market may be overbought.
Turning to the chart, we see the April Gold contract trading above the 1400 level. Trading north of 1400 has been somewhat choppy and sideways. Traders are now focused on whether we are seeing consolidation before a breakout. A breakout could send Gold prices into uncharted territory. The measure of such a move suggests that prices could trade into the 1480's. The RSI is showing overbought levels, suggesting prices could face increasing resistance.
Rob Kurzatkowski, Senior Commodity Analyst