Currency Traders Keep Gold in Check
Tuesday, November 15, 2011
The recent strength of the US Dollar has curbed some of the enthusiasm for Gold of late. There seems to be an underlying belief that Europe will avoid the worst case scenario, but growth will be negatively impacted. Escalated concerns over Europe could, however, result in renewed enthusiasm for defensive plays, such as Gold. Technically, The December Gold contract needs to cross above the 1800 level to recapture bullish momentum. Otherwise, the market could find itself trapped in a 100+ point trading range between the high 1600's and 1800. Traders may look to go long the appropriate December futures contract (micro, mini or full sized) on a solid breakout above the 1800 level.
Fundamentals
The rally in Gold has stalled in recent sessions, as the safe haven buying of the metal has been largely offset by currency related selling. The US Dollar Index has been firm in recent trading, largely due to the weakness in the Euro, which has the largest weighting in the index. The contagion in the European debt crisis has many analysts expecting a slowdown or recession in Europe, which negatively impacts Gold as an inflation hedge. There have also been some red flags raised as to the health of the Chinese financial sector by the IMF, which has some traders on edge. John Paulson, the hedge fund manager with a massive GLD position, indicated that he had cut his holding in the ETF by more than a third. This can be seen as a negative force in the near-term unless other buyers are able to step in an fill the vacuum created by Mr. Paulson. If this does not happen, the ETF would have to sell some of its holdings, easing the tightness in the physical Gold market. While Gold fundamentals are mixed in the near-term, Europe remains the wild card for metal traders. A slow, downward spiral could be seen as negative for precious metals. If the crisis escalates in severity quickly, safe haven buying could overwhelm currency related selling.
Technical Notes
Turning to the chat, we see the December Gold contract unable to hold rallies above the 1800 level, despite testing the level several times in recent sessions. Failure to break through 1800 could result in sideways trading between the high 1600's and 1800. If the market is able to break through 1800, there is not much in the way of resistance between this level an all time highs north of 1900. The RSI indicator was giving overbought readings, which can partially account for prices not being able to gain upward traction in recent sessions.
Rob Kurzatkowski, Senior Commodity Analyst
