Safe Haven Buying Has Gold Bucking the Commodity Trend
Today's Idea
The EU debt crisis and lackluster US economic data continue to make Gold appealing to many risk averse traders. Investment demand from both sides of the Atlantic has increased physical demand for the metal. Technically, the Gold market seems to have found its footing above the 1475 level, but the upside potential of the market is unknown. For this reason, some traders may wish to consider selling a July Gold 1465 put and buying a July 1440 put for a credit of 6.00, or $600. The initial credit is the maximum profit and the trade risks $1,900. Some traders may wish to exit the position in the event that the August futures contract closes below 1475 for two consecutive sessions to mitigate some of the risk.
Fundamentals
Many traders have turned to Gold as a safe haven during the European debt crisis, making it one of the few commodities to have found its footing recently. Not only has the sovereign debt situation worsened in the EU, but US economic indicators have taken a turn to the downside. Most notably, the US housing market appears that it could be heading toward a double-dip. The Dollar has rallied versus the Euro in recent sessions, which has pressured commodities as a whole. However, the Fed uses the housing market as a gauge of economic health, and a prolonged slowdown in housing could force the central bank's hand in keeping rates lower for a longer period of time than many would like. Physical demand for the metal from investment has also made the cash market for Gold tighter. European and US traders alike have been buying Gold ETFs to lessen their exposure to economic conditions. Last week's news that China has become the largest Gold buyer in the world comes is hardly surprising, but still moved the metal higher. China's push for a world currency has slowed recently, and the Asian giant may take a more traditional approach and replace a large portion of its currency reserves with precious metals to lessen their currency exposure.
Technical Notes
Turning to the chart, we see Gold finding support near the 1475 level, which coincides with minor chart support in the area. Yesterday's close puts the contract back above the 20-day moving average, suggesting that a near-term low may be in place. August Gold is now trading above the relative high at 1516.90, hinting at a possible test of all-time highs. The high at 1557.10 could be seen as major resistance moving forward, and on the downside, support can be seen at 1475. Failure to take-out either level would suggest that Gold could be mired in sideways trading.
Rob Kurzatkowski, Senior Commodity Analyst
