Gold Rush Over?
Thursday, August 25, 2011
The relatively benign economic data over the past week appears to have put an end to the doomsday mentality for equity traders, at least for now. Gold still has extremely strong fundamentals and will continue to have a positive outlook as long as the printing presses in Washington and elsewhere keep printing currency. For now, however, Gold may be coming down to levels that are much more attractive for long-term buyers. Where exactly that is remains to be seen. Technically, the scope of the sell-off will be hard to gauge, as it always is when a market goes parabolic. The CBOE Gold Volatility Index, GVZ, is at its highest level in two and a half years. The last time the index was at these levels, the market was coming off the 2008 equity sell-off, which is not likely to repeat itself here. Some traders choose to consider entering into a short volatility strategy, such as a ratio backspread, expecting volatility to drop.
Fundamentals
The Gold market is seeing its third consecutive day of heavy selling pressure after making all-time highs. It is no coincidence that the sell-off comes after the CME Group raised requirements on the metal, but this likely was not the lone reason for the sell-off. Gold prices have rallied since the beginning of July without a meaningful correction or consolidation. Stocks have also seen a reprieve from selling pressure over the past several sessions, lessening Gold's appeal. Now that prices have come back down to earth, many traders are awaiting Fed Chairman Bernanke's speech in Jackson Hole for further guidance. Last year, Bernanke hinted at what ultimately came to be known as QE2. A similar announcement this year could quickly turn this sell-off around. For now, it seems as though some traders have abandoned their rush to safe-haven buying, as evidenced by not only Gold's decline, but the pullback in Bonds and the Swiss Franc. A sustained rally in equity prices could mean further declines, whereas a fresh round of negative economic data could take some of the selling pressure off the Gold market.
Technical Notes
Turning to the chart, we see the December contract pulling back sharply after flirting with the 1900 level. The parabolic move higher and subsequent sell-off in prices could bring prices down to more realistic levels. The sell-off, at least on the surface, does not appear to be a harbinger of the end of the bull market. Since the market has gone virtually straight up since the beginning of July, some traders may look to use Fibonacci retracement levels to gauge support.
Rob Kurzatkowski, Senior Commodity Analyst
